Monday, September 18, 2006

Robber baron causes panic 1873

Twelve years of unchecked expansion (1865-1873), the economy was bloated from inflation, an excess of speculation, and one man’s mistake combine for Panic. For 5 years after the 1873 panic, banks closed (37), brokerage houses shut their doors (2), markets deflated, American’s faith in the economy was nonexistent, and the nation seemed on the verge of collapse. It was one of the worst financial crises in America’s history.

The failure of the Philadelphia investment house of Jay Cooke & Co., who played a large role in financing the Union war effort by marketing federal bonds to farmers and workers, began when he decided to invest in just one more railroad. Between 1865-1873, Cooke's firm financed 35,000 miles of new railroads track.

The Union Pacific was a success. The Northern Pacific was not.

Railroads overbuilt, setting the stage for disastrous competition for freight traffic. Investors speculated heavily in railroad securities, and in 1873, it all crashed.

Cooke's failure drove panicked banks to demand payment of loans. Investors rushed to sell stocks in order to protect their capital.

“As stocks on the New York exchanges sunk lower, borrowers had no money with
which to pay their debts. Businessmen, many of whom had borrowed money to
expand their operations during boom times, released workers.”

It’s got to be difficult to be single handedly responsible for such a financial depression. Cooke was in bankruptcy, involved in Canadian corruption scandals, caused Prime Minister Sir John A. Macdonald to lose his office in the 1873 election, and yet still managed to turn everything around.

By 1880 he’d met all his obligations, invested in an Utah silver mine, and was wealthy once more. Ha. Must be nice. Forced to give up his Ogontz, PA estate in bankruptcy, he repurchased it and converted it into a school for girls. Actually, it seemed he really was a nice guy.

1 comment:

Jenn said...

Well I had no idea--so I looked it up.

You have to understand that A Huge part of our becoming Canada depended on a railroad linking British Columbia to the east. Our Prime Minister gave the contract to a Montreal guy named Sir Hugh Allan, who was a friend of Cooke. Allan wanted the railroad to cut through the U.S.--apparently to link with Cooke's Northern Pacific and therefore save Cooke money and competition. The whole point, as far as Canada was concerned, was that it link CANADA, so this was completely out of the question. All well and good, except Allan was also a major funding resource for several Conservative politicians--Sir John A. among them. Finding himself in a monetary crisis, our PM sent a telegram to Allen: "I must have another $10,000. Will be the last time of calling. Do not fail me. Answer today." I don't know if Allan gave MacDonald the funds, but I DO know he kept the telegram locked in his lawyer's vault to pressure MacDonald. A law student and Liberal supporter working in that office stole the telegram, and it wound up read out in our House of Commons. A confidence vote was then lost by MacDonald, causing him to lose office.

John A MacDonald turned out okay, too, winning the election in 1878 and dying in office in 1891. Sir Hugh Allan made a fortune from the railway and his enormous house still stands at the top of Montreal's McTavish Street.

There has GOT to be some lesson we haven't learned that all the 'principal players' end up wealthy and powerful while the poor saps that lost everything, well, lost everything.