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Jay Cooke's Gamble
The Northern Pacific Railroad, the Sioux, and the Panic of 1873
By M. John Lubetkin
UNIVERSITY OF OKLAHOMA PRESSCopyright © 2014 University of Oklahoma Press
All rights reserved.
"God's Chosen Instrument"
Philadelphia, Thursday, September 18, 1873: like most businessmen, Jay Cooke was concerned about the "stringency" (shortage) of cash, Wednesday's sharp stock decline, and the failure of Kenyon Cox & Co., a respected medium-sized banking house, the previous week. Three days earlier, when President Grant had spent the evening at Cooke's 53-room mansion, the two men likely touched on Wall Street's condition. As he had for the past few days, Cooke came to his offices early Thursday morning to keep abreast of the news through his private telegraph system.
Jay Cooke & Co., if not the nation's largest banking house, was clearly its most powerful. Decades later, people who knew both men would compare J. Pierpont Morgan with Cooke, the man regarded as one of the Union's saviors, the "financier of the Civil War," who had conceived and managed the sale of over $1.6 billion in federal bonds to hundreds of thousands of investors, all without a whiff of scandal. The public and the military, aware of George Washington's monetary travails during the Revolution, were grateful for Cooke's effectiveness and honesty. After the war, as mid-twentieth-century business historian John T. Flynn noted, Cooke bought members of Congress, bribed two vice presidents, built churches, gave vacations to penniless ministers, and combined the qualities of money getting, corruption, farsightedness, and piety in such successful proportion that he was venerated by the public, feared by politicians, and considered by all the country's leading banker.
In the past days, despite Wall Street's failures, sell-offs, rumors, and melodramatic accounts of Indian fighting along the Yellowstone, Cooke's Northern Pacific Railroad had held firm, buttressed not so much by logic as by his support. In the two years since the death of his wife, he had become increasingly reclusive—his life more rigid, his dress outdated and almost bizarre, his vacations varying only by the number of fish he caught. Cooke was not a gifted speaker, read little other than the Bible and religious tracts, and had no interest in the arts; but he was an insightful businessman and brilliant listener, instinctively understanding others—only he would have thought to have a magician entertain a visiting Sioux delegation.
At 52, Cooke was absorbed by the Northern Pacific. His interest in the Northwest had begun as a teenager in St. Louis, watching steamships leave for and arrive from the Upper Missouri. In 1873 he firmly believed, as he had during the war, that he was again acting as "God's chosen instrument" by building the NP. Cooke was the NP to tens of thousands of investors. After thirty months of inept, dishonest management, he had stepped in and taken charge; for the first time the NP would take in more cash than it spent, complete its transcontinental surveying, and let bids for 205 miles of track between Bismarck and the Yellowstone River.
About 11 A.M. there was a discreet knock on Cooke's door. However rigid he was in dress and decorum, he wanted news instantly. At first glance, the telegram's contents may not have registered; but then, upon rereading it, stoical as he was, he probably had to fight an involuntary gasp. Other telegrams quickly arrived. Glancing up and walking toward the front of his bank, Cooke gave an order and attempted to regain his composure.
Any understanding of the Northern Pacific must begin with Cooke, a descendant of Henry Cooke, who arrived in Salem, Massachusetts, about 1638."I never paid much attention to this matter," Cooke wrote, but "I believe fully in good ancestry" (Cooke's emphasis). While he professed little interest, Cooke knew that the family's story was an honorable one. His grandfather Asaph Cooke may have lined up on the village green at Lexington, Massachusetts, on April 18, 1775; more documentably, his maternal grandfather, David Carswell, marched with Richard Montgomery into Canada and helped capture Montreal. Carswell was taken prisoner at Quebec, but he survived both wounds and scurvy and, after Saratoga, was exchanged and freed.
Meanwhile Asaph Cooke and his wife settled near Glen Falls, New York. Jay's father was born in 1787 and given the name of an obscure second-century saint and bishop of Rome, Eleutheros. According to family history, he attended Union College (Schenectady) and studied law in Albany under Chancellor Kent. In 1812 he married Carswell's daughter Martha and in 1816 set out for the West. It took them over a month following the Mohawk (by canoe), Allegheny (by log raft), and Ohio (by flatboat) until they stopped at Madison, Indiana. Two years later Eleutheros, briefly returning to New York, "discovered" Sandusky Bay and moved his family there.
Jay Cooke was born in Sandusky on August 10, 1821. Eleutheros, hating his own name, kept his son's short and simple: Jay, after John Jay, without even a middle name. The land was still comparatively wild, with bears and wolves, and the fishing, which Jay loved, was spectacular. When Wyandot Indians, decimated by defeat, disease, and alcohol, came to receive their annual government payments, it was a time of high excitement. Jay, bright and quick to laugh, recalled being carried on the shoulders of an old Wyandot chief, Ogontz, who often slept in the Cookes' barn.
Eleutheros became an attorney, promoter, real-estate insider, and state legislator and was elected to the 22nd Congress (1830). When William Henry Harrison visited Sandusky, Old Tippecanoe stayed with the Cookes. Like many Sanduskians with New England backgrounds, the Cookes adamantly opposed slavery, and their house became part of the underground railroad. Jay recalled the Fugitive Slave Act with anger: a local judge, his brother Pitt's father-in-law, freed some fugitive slaves and was then successfully sued. "This ... [law] was one which was very distasteful," he wrote,"[because] it made us all liable to do duty as slave catchers."
In 1836 a New Yorker (remembered only by his last name, Seymour) became enamored of one of Jay's cousins and went to St. Louis to start a dry-goods firm. Wishing to ingratiate himself, he offered Jay a job at a whopping $600 per year, "not only for my own merits," Jay recalled, "but as a link [to my cousin]." By July young Jay, who had spent his life in tiny Methodist Sandusky, was in St. Louis. Five years earlier the Yellow Stone had been the first ship to steam up the Missouri to its confluence with the Yellowstone. The ship carried over a hundred tons of goods, including thousands of gallons of Monongahela whiskey, peach brandy, cherry bounce, and concentrated spirits of wine. Soon a half-dozen steamers made the annual trip, each one inexorably increasing America's dominance over British traders, who had to transport their goods across the Atlantic.
With a population of some 7,500, St. Louis was the nation's western commercial hub. The town was wide open at night, with people carousing in the bars, gambling halls, and brothels along the waterfront. During the day it was a mixture of New Orleans, Canadian, and U.S. culture. Jay quickly learned French and also heard Lewis and Clark stories almost firsthand. Clark, infirm and in his sixties, lived in St. Louis, and Jay was swept along by the grand saga as steamers, bateaux, canoes, rafts, and virtually anything that could float a few thousand miles arrived from the Upper Missouri loaded with furs.
The Panic of 1837 ended Seymour's business and his relationship with Cooke's cousin. Decently, he paid Jay, who returned to Sandusky. The next year William Garroway Moorhead, Jay's 26-year-old brother-in-law, invited him to Philadelphia. Moorhead had formed a company to take passengers from Philadelphia to Pittsburgh by a combination of rail, stage, canal, and steamer. Jay sold tickets, kept books, wrote ads, paid bills, and quite likely performed janitorial duties. But Moorhead, whose skills never lay in the humdrum world of business operations, soon faced extensive competition. As bills piled up, Moorhead faded away like Alice's Cheshire cat, and by mid-autumn the company was bankrupt. Before returning home, the now self-confident Cooke, 17, wrote his parents that he would arrive with "a trunk full of presents and plenty of cash in my pockets ... [feeling] as healthy as a rat in a granary."
Jay had every reason to feel good: his herculean efforts had caught the eye of banker Enoch W. Clark. Clark's private banking house dealt in stocks, bonds, promissory notes, private and public banknotes—anything that offered a profit for a financial middleman. Tightfisted, Clark offered Jay a clerk's position at $300 a year. Clerks often worked thirteen-hour days, six days a week, and had to write legibly, do arithmetic quickly, keep books, and place a value on everything that came across their desks—to say nothing of spotting counterfeit items. By 1840 Jay balanced Clark's books, did legal work, and wrote ads and a daily financial column. Clark was no fool; Jay soon became part of his family, eating with them on holidays. On January 1, 1843, he was made a full partner, gratis, with one-eighth of the company. At Clark's death in 1856, Jay was running the company and successfully steered it through the Panic of 1857.
In Philadelphia, unlike Sandusky, Jay never found a bachelor niche for himself. In 1842, while visiting his brother Henry at Allegheny College in Meadville, Pennsylvania, he met the president's sister, Dorothea Elizabeth Allen, just 15, visiting from Baltimore. "I lost my heart the first day," he wrote 50 years later, "and the second day we were sworn friends and life long lovers." Despite the objections of her parents, Jay bombarded Elizabeth with letters and visited whenever possible. "I occasionally spent a day or two with her there—moonlight horseback rides of course and lots of other pleasant adventures," he recalled. Finally the Allens capitulated, and the two married on August 21, 1844. But the union had its strains; the Cookes were abolitionists, while the Allens owned slaves, and two of Elizabeth's brothers later fought for the Confederacy. Philadelphia's Methodists were too liberal for Elizabeth, so the couple joined the Episcopalian church. In the years to come, Elizabeth would bear eight children, four of whom survived childhood.
In Philadelphia Cooke went from one success to another, investing in canal, telegraph, and railroad companies. "Rather than a gambler," Carl Sandburg wrote, "[he was] a speculator with an eye for good risks." At the opening of the Mexican War (1846), to raise $50 million, the U.S. Treasury called for bids. When the dust settled, Clark's firm (led by Cooke) was one of two companies selected. But in 1858 Cooke, bored and worth perhaps $250,000, announced his retirement. He continued putting deals together, but he did what he wanted: "free foot," he called it. A rare setback was his investment in the Vermont Central Railroad, which turned sour after a protracted legal battle. On January 2, 1861, he opened his own firm, Jay Cooke & Co. To drum up business, he gave one-third ownership to Moorhead, then president of the Philadelphia & Erie Railroad. He "knew nothing" of banking, Cooke wrote,"[but] I had the benefit of the large business which from time to time flowed into the firm through his position."
Jay's tiny banking house opened just as the Civil War began. The first lengthy conflict of the industrial era, the war forced both sides to design, construct, and operate effective logistical systems as well as to raise money systematically. Besides raising taxes, another option was to print paper money and hope for battlefield success. This salutary approach (if one is not upset by inflation) worked quite well for the South but proved flawed after Gettysburg and Vicksburg. Unfortunately for the North, the Treasury had just $1.7 million in hand when Lincoln took office and was soon spending a million dollars a day. Given the lack of cash and what little tariffs and fees brought in, the federal government decided to assume a 90-day war.
The North's finances were guided by treasury secretary Salmon P. Chase. Chase was in the cabinet because Lincoln, believing Chase had strong Republican Party support but not trusting him, wanted him where he could control him. But, as economic historian Theodore J. Grayson wrote,"[Lincoln's] greatest mistake of all" was picking a man who "knew very little about finance and ... proceeded to prove his ignorance." Neither Chase nor Lincoln wanted to finance the war by printing money or adding high income taxes; so they temporized, attempting to sell bonds.
Following Fort Sumter, Cooke was determined to assist the North. He felt that slavery was a mortal sin and was embarrassed that the North had not acted earlier. "I have always felt that God designed punishing the whole nation, north and south for the evil and crime of slavery," he wrote. Cooke also appears to have been a quiet prewar activist, although to what degree is not clear. Following the Harper's Ferry raid, he harbored two of John Brown's sons, John and Owen, and later openly employed Owen as a caretaker on Gibraltar, the Lake Erie island he owned. Owen was "very strange in his ideas and ways," wrote Cooke, delicately avoiding the fact that Owen kept with him the mummified corpse of his brother Watson.
Cooke's war involvement began just after Lincoln's inauguration. In Ohio Henry Cooke had close ties with Chase (he was Chase's executor), publishing a Republican paper that Jay subsidized. Henry brought Jay and Chase together; while everybody said the right things afterward, the meeting was chilly. Nevertheless, on April 20 Chase offered Cooke the position of assistant treasurer, a high post, but one that he did not want. After some hesitation, Jay declined, seemingly losing any hope to influence Northern financial policy.
While most Northern states gave the federal government men, equipment, and cash, Pennsylvania, which had promised 10,000 troops, was stymied because of previous bond defaults. Cooke volunteered to sell the bonds but was rebuffed. He then watched helplessly as the state's financial officials discovered that they could not sell the bonds. Finally, they sheepishly came back to him. Upon receiving approval on May 28, Cooke charged ahead with his old friend Anthony J. Drexel, Philadelphia's dominant banker. In three weeks they sold over $3 million in bonds. Cooke himself subscribed $10,000, which became public knowledge and added to the public's faith in him: he sold only securities in which he also invested.
On July 21, 1861, the North was defeated at Bull Run. Federal censors tried to block the news, but a Philadelphia Inquirer reporter slipped back into Philadelphia the next morning. The news quickly spread, and businessmen wandered the streets in shock. Cooke, as surprised as anyone, swung into action. Instead of trying to gloss over the battle, he made it a rallying cry, just as the Alamo had been or Pearl Harbor and the World Trade Center would be. Going from one downtown office to another, Cooke had $1.75 million in pledges by noon, twenty hours after the battle's end. He instantly became a national hero and knew he had a workable formula, whereas Chase saw a competitor grabbing headlines. Probably prodded by Lincoln, Chase took Cooke with him to New York in August as the government tried to raise $50 million. Chase did the talking and found the banking houses unenthusiastic. The bankers, Matthew Josephson wrote in The Robber Barons, "had neither the bubbling patriotism of Cooke nor his dazzling vision." The bonds finally sold but only at 12 percent, debasing previously sold bonds and adding to inflationary pressures. Cooke had Lincoln's support; Chase began utilizing Cooke but constantly undercut him, reduced his commissions, questioned expenses, and treated him condescendingly.
Cooke became Chase's advisor for a $150-million bond program set for late 1861, but Chase limited his sales territory to only Philadelphia and nearby New Jersey, allowed nothing for advertising or operations, and left him on a commission-only basis. Nevertheless, Cooke enthusiastically went after a wide audience by mixing patriotism, small-denomination sales, and public awareness. Traditionally only the wealthy had been solicited, but his instincts said that the North's huge number of middle-class artisans, merchants, and farmers felt that the war was a noble cause and wanted to participate. Writing much of the copy himself, Cooke advertised in English and foreign-language papers. He also played hardball: publishers not carrying the patriotic stories that he submitted could forget advertising dollars. His participation, Josephson wrote, "was so brilliant ... he sold so much more than the other bankers (about one-fourth of the total) that his demands [to run the entire program] could not long be resisted." Cooke had done nothing less than formulate bond sales in the United States and Great Britain for World Wars I and II.
Excerpted from Jay Cooke's Gamble by M. John Lubetkin. Copyright © 2014 University of Oklahoma Press. Excerpted by permission of UNIVERSITY OF OKLAHOMA PRESS.
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