The specific cause usually assigned by economic historians for the panic of 1873 was the failure of the great house of Jay Cooke and Company, as the result of tying up its resources in the Northern Pacific Railway. The incident was, however, only typical of the times; and if Jay Cooke never had lived, the story would have differed chiefly by the substitution of another name for his. The house of Jay Cooke and Company had grown to power and prestige by the clever and original methods employed by Mr. Cooke in borrowing money for the Government during the Civil War. Cooke was a true child of the new America, the first or nearly the first male child born, as he was fond of boasting, in Sandusky, Ohio. Through political and social connections, he entered a Philadelphia banking-house during the period of hazardous financing and State banking before the Civil War, and had made enough money by 1859, while still under forty years of age, to contemplate retiring from active business. But his was not a nature for inactivity. The close relations established by his father and his brother with Salmon P. Chase, the new Secretary of the Treasury, obtained Cooke a hearing in the floating of the early war loans. He was not of the old style of banker, who sat in his office waiting for a customer to come in; he quickly realized that if the Government was to obtain the money necessary to carry on the war, it must be by educating the people to understand the value of the war bonds, and the necessity of taking them as a patriotic duty.
It was a wonderful campaign of advertisement, of canvassing the post-offices, of manipulating the press, and of removing opposition, which Cooke carried on in floating hundreds of millions of the five-twenties, the ten-forties, and the seven-thirties. The later flotations, however, which came after the war, required perhaps as much skill as the earlier ones, because they involved persuading the people to retain their public funds while accepting considerable reductions of interest. Inevitably Cooke’s success drew competitors into the field. When the question of refunding arose, a committee representing other New York banking-houses appeared in Washington to demand a share in the operation. The composition of this committee is of interest because it was virtually the first appearance on the stage of public finance of John Pierpont Morgan, then a young man of thirty-five. He, with Levi P. Morton, who had established the banking-house of Morton, Bliss and Company, and had enlisted the aid of the Rothschilds, appeared in Washington in January, 1873, and demanded and obtained from Secretary Boutwell a share in the new issues. The methods of the syndicate had little of the “go” of the old Cooke methods, and already the tightening of the money-market was making itself felt. Where subscriptions of $600,000,000 had been expected for the new loan, they amounted after several weeks to less than $50,000,000, and the entire operation was ultimately suspended by the outbreak of the panic.
The lack of uninvested capital to subscribe for the government loan was a warning of conditions prevailing in the money-market generally. Jay Cooke, swept along by the great success of his methods in disposing of the war loans, believed it possible to perform the same miracle with the bonds of the Northern Pacific. It was his calculation that he could sell bonds as fast as he was called upon for money for the work of construction, and it was distinctly provided in the contract with the road that the advance in excess of the amounts realized from sales of bonds by the bankers never should exceed $500,000, which itself was secured by the deposit of the company’s bonds at fifty cents on the dollar.
During the summer of 1872, however, with President Grant’s campaign for re-election against Horace Greeley at its height, sales of bonds fell to a few hundred thousand dollars a month, while the drafts of the treasurer of the railway company were running at about $1,000,000 a month. Inevitably, the balance of floating indebtedness by the railroad to the banking house began creeping up, until it stood near the close of August at $1,583,000. Ex-Secretary McCulloch, who had become head of the London connection of Jay Cooke and Company, and other associates of Cooke were quick to realize that the house was getting into deep water, and that further uncovered advances must be stopped. It was much easier to lay down this rule, however, than to carry it out. Already there were complaints along the line of construction that wages were not being paid promptly and that men were being laid off. Smaller railway enterprises in hands less strong were going to the wall from similar causes, and in October, 1872, the coupons were defaulted on the St. Paul and Pacific road, in which a controlling interest was owned by the Northern Pacific.
The year 1873 was thick with omens of disaster for the new railway enterprises. The Boston fire of the previous November, while not so disastrous as that in Chicago the year before, caused a crash in the stock market similar to that which followed the San Francisco fire in 1906. Scandalous frauds were disclosed in the management of the Erie Railroad; General John C. Frémont failed conspicuously in an effort to raise money for the Southern Pacific system in France; and at last grave exposures were made in connection with the Union Pacific Railroad, which resulted in the Crédit Mobilier investigation and its long train of scandals. A traveler in Germany wrote home in August that an American railway bond, “even if signed by an angel in heaven, would not sell.” So desperate was the situation becoming that Henry Cooke, brother of Jay Cooke, put his chief dependence, in a letter to his brother, on “an unfailing confidence in the God in Whom we put our trust.” “I do not believe,” he said, “He will desert us.”
But the Lord did not intervene to prevent the results, which seemed to the profane to be an inevitable outcome of economic laws. Jay Gould was still manipulating a powerful gold pool in the late summer and early autumn, when on September 8, 1873, the first rude blow was given to the card house of the New York money-market. The New York Warehouse and Security Company suspended, followed five days later by a firm with which Daniel Drew was associated. When Jay Cooke reached his Philadelphia office on September 18, he found a despatch announcing that the New York office had been closed by his partners in that city. The news spread like fire on one of the Northern Pacific’s own dry prairies. Other houses fell the same day or the next day; stocks dropped from twenty to forty points; money could hardly be had at any price; and the Stock Exchange Committee closed the exchange, in the language of the vice-chairman, “to save the entire Street from utter ruin.”
While ultimately the assets of the failed house proved to be amply adequate to meet its liabilities, the career of Mr. Cooke as a financier was ended. Facing cheerfully for a time the prospect of extreme poverty, he found his fortune partially recouped six years after the panic by an almost forgotten mining investment. Repurchasing his old home in the suburbs of Philadelphia, he continued to live there, content with the society of his children and grandchildren, his farming and fishing, almost forgotten by the new generation of Americans, until his death in 1905 at the age of eighty-four. In his great cape cloak and his wide-brimmed, gray, soft felt hat, set over a gentle face adorned by a long white beard, his patriarchal figure was long familiar in the streets of Philadelphia, a very different type from the shrewd, grasping men who speculated in their country’s fortunes in the New York gold-room.
THE FIRST MOVE FOR A CONTRACTION OF THE CURRENCY
THE disorder and discouragement caused by the panic did not make easy the return to a sound monetary system. Already, prior to 1873, the people had expressed themselves against the policy of acute contraction so vigorously urged by Secretary McCulloch. The return of the Southern States to the Union naturally opened a new field for the circulation of greenbacks and national bank-notes. Influenced by this wider area of circulation for the employment of money, and by the improvement of public credit, the greenbacks rose from a gold value of $49.50 in 1865 to $71.20 in 1866, for $100 in paper. There was little further change in average value until 1870, when there was a gain of about $10 per $100 and a further advance the next year to $88.70, which remained substantially the average during the years of depression that followed. The average value of these years, however, is no measure of the fluctuations, which arose naturally from differences in the demand for currency and were made erratic from time to time by speculation.
Up to 1875 no one knew what steps were to be taken, or whether any were to be taken, to restore specie payments. Half a dozen different schools argued crudely, with imperfect economic knowledge and narrow horizons, as to the proper policy to be pursued. For a moment the sturdy Scotchman, McCulloch, at the head of the Treasury from 1865 to 1869, carried Congress with him in his policy of sharply contracting the volume of government notes by an issue of bonds. A resolution passed the House of Representatives on December 18, 1865, by a vote of 144 to 6, that the House cordially concurred in the view of the Secretary of the Treasury in relation to the necessity of a contraction of the currency, with a view to as early a resumption of specie payments as the interests of the country would permit, and that “We hereby pledge coöperative action to this end as speedily as practicable.”