It was a cool Monday evening on September 15, 1873, when legendary financier Jay Cooke entertained President Ulysses S. Grant at Ogontz, his marble-walled, 53-room estate north of Philadelphia. The 200-acre grounds sported babbling creeks, a deer park, an aquarium, stables, mock Roman ruins and a private telegraph system.
Cooke had founded the first investment bank in the United States, Jay Cooke & Company, a decade earlier. More recently, in 1870, he’d financed construction of the Northern Pacific Railway, a transcontinental railroad that would eventually connect Lake Superior in the Midwest to Puget Sound on the West Coast. Thundering “iron horses” chugged along its 6,800 miles of track, spewing smoke and sparks into the tribal territory of the Lakota, Sioux, Dakota and other Indigenous peoples and charting a path to what became Yellowstone National Park and the vast stands of timber of the Pacific Northwest.
Historians don’t know exactly what Cooke and Grant discussed that fateful evening in September. But the president was highly inclined to listen to what Cooke had to say. Cooke had donated millions of dollars to Grant’s winning re-election bid for the presidency in 1872. Before that, Cooke had grown immensely wealthy by building an investment network that sold more than $1.6 billion in Civil War bonds to small-time investors across the North. Grant had lauded him for ensuring the Union’s successful campaign against the Confederacy, which had far less capital.
Cooke later harnessed his pioneering direct-to-consumer investment concept to offload bonds in a scheme selling the latest technology—railroads—to the next generation of individual investors. “It was like selling to crypto investors today,” says historian Richard White, author of Railroaded: The Transcontinentals and the Making of Modern America. “These investors were basically living off of the promises of famous people they had trusted before.”
The rise of the railroad industry
Railroads were America’s first truly billion-dollar, “unicorn” businesses. If the Fortune 500 had been around then, railroad firms would have been at the top of the list. “They were the wonder of the age,” says John Steele Gordon, author of The Scarlet Woman of Wall Street: Jay Gould, Jim Fisk, Cornelius Vanderbilt, the Erie Railway Wars and the Birth of Wall Street.
Transcontinental routes enabled people and goods to traverse vast distances at what were then considered lightning speeds and drastically reduced costs. As economist Arthur Twining Hadley wrote in 1885, “Two generations ago, the expense of cartage was such that wheat had to be consumed within 200 miles of where it was grown. Today, the wheat of Dakota, the wheat of Russia and the wheat of India come into direct competition. The supply at Odessa is an element in determining the price in Chicago.”
Immigrant laborers laying the Northern Pacific’s lines of track saw trains sink into the swamps, peatbogs, sinkholes and quicksand. The bogs were “sometimes mere potholes into which a man would step and find himself wallowing waist-deep … filled with black muck which was not water, for no one could swim in it, nor land, for no one could walk upon its surface,” wrote Cornelia Lynde Meigs, a surveyor’s daughter, in a 1937 novel. As the late author M. John Lubetkin recounted in Jay Cooke’s Gamble: The Northern Pacific Railroad, the Sioux and the Panic of 1873, engines sometimes sank into the mud or slid off the tracks at temperatures of minus 36 degrees Fahrenheit. Sitting Bull and other Native American warriors seeking to assert their original rights to the land harassed the surveyors trying to build the railroad, though the Gatling guns of the U.S. Army mostly protected the workers.
A railroad of any size required an enormous outlay of capital to purchase locomotives, rolling stock, stations, terminals, train yards, and other equipment and infrastructure. As a result, the rise of the railroads inspired entirely new forms of corporate securities and governance. They also yielded stupendous levels of fraud and chicanery, wrote business historian Alfred D. Chandler Jr. in his 1965 book, The Railroads: The Nation’s First Big Business. Railroad owners often made more money on construction, land and mineral rights than they did on operating the tracks themselves.
“Railroad bonds were a very risky, very speculative investment,” says White. “So when Jay Cooke takes on the Northern Pacific, it is in hindsight probably the riskiest of any of [his] investments.”
The Panic of 1873
In December 1872, James Lees of banking house Lees and Waller wrote a letter warning of the coming railroad investment crash, decrying the enormous amounts of capital invested, often from Europe, “a great deal of which has been wasted in extravagance and ill spent in wildcat enterprises such as railroads through deserts—beginning nowhere and ending nowhere.”
It doesn’t take a big leap of the imagination to presume that on the fateful Monday evening Cooke and Grant met, they discussed the financier’s increasingly desperate need for the U.S. government to shore up his nearly insolvent but systemically important bank. A financial crisis in Europe had prevented Cooke from raising money there, and big investors in the U.S. had written him off. After becoming embroiled in the financial shenanigans of the 1860s and 1870s—from Jay Gould’s attempt to corner the gold market to the Crédit Mobilier bribery scandal that led to the investigation of multiple members of Congress—Grant was in no mood to help out a railroad robber baron, no matter how well connected he was or how fine his estate appeared.
On September 18, three days after Cooke’s 11th-hour meeting with the president, his investment bank, as vital at the time as Goldman Sachs is today, went bankrupt. Not only were Cooke’s depositors wiped out, but so too were the legions of investors who had held now-worthless bonds and stocks in the Northern Pacific. The very next day, Cooke instructed his servants to close up his Gibraltar estate on Lake Erie.
The news of Cooke’s fall swept across New York City, and within a few hours, hundreds of people had gathered outside his shuttered bank, peering into the windows “as if some wonderful transformation was about to be witnessed,” the New York Times reported on September 19. Police officers struggled to keep the crowds from breaking down the doors. A drawing published in Frank Leslie’s Illustrated Newspaper captured the pandemonium on Wall Street outside Cooke’s New York bank that day.
According to the Times:
The brokers stood perfectly thunderstruck for a moment, and then there was a general run to notify the different houses in Wall Street of the failure. The brokers surged out of the exchange, stumbling pell-mell over each other in the general confusion, and reached their respective offices in racehorse time. … Men went about the street with blanched faces. … Some of the men who were ruined swore, some of them wept, some went out of the street without saying a word; others talked of the trouble in a jovial way and went about trying to borrow money from friends.
The fallout of the first Great Depression
In a scene later mirrored during the Great Depression, the Great Recession of 2007 to 2009, and the more recent failures of regional firms like Silicon Valley Bank, financial institutions faced a bank run, and scores shut down.
“The insolvency of Jay Cooke was the straw that broke the camel’s back on Wall Street, because it was completely unexpected,” says Gordon. “All banks are insolvent in the short term. They tend to lend long and take deposits short, so when people panic, they take the money out of the bank, and banks can’t meet their obligations. They’re bankrupt.”
The New York Stock Exchange suspended trading for the first time in its history, remaining shuttered for ten days to stem the panic. Grant, leading bankers and members of Congress hastily discussed a Treasury Department bailout, but the president steadfastly rejected substantial financial measures to address the economic fallout.
The Panic of 1873—or the first “Great Depression,” as it was known at the time—lasted more than five years. It wiped out 121 railroads, destroyed more than $15 billion in value at today’s prices, and bankrupted 18,000 other businesses. Countless small-time investors who had put their hard-earned money into the speculative railroad bubble were wiped out.
Among the first institutions to go under was the Freedman’s Savings Bank, which held the life savings of many formerly enslaved Americans. Cooke’s brother Henry D. Cooke, the governor of Washington, D.C., lent the bank’s capital to stave off the collapse of Jay Cooke & Company.
Some “of the first people [to] lose everything in this crash were freed slaves from the Civil War, and they do that because of Jay Cooke and Henry Cooke and their corrupt bargain,” says White.
One of the most disturbing consequences of the Panic of 1873 was the loss of trust among the many small, sometimes well-informed investors who had invested in risky Northern Pacific bonds. If Cooke and his many well-connected agents couldn’t be trusted, who could? “Their trust had been violated,” wrote White in a 2003 article for The Journal of American History. “Most disturbingly, [the New York Sun noted] those deceived were ‘the intelligent classes, who read newspapers, mingle in affairs and have constant access to information.’”
In the depression’s aftermath, unemployment surged to 14 percent nationally and as high as 25 percent in New York City. Many Civil War veterans became transients, spawning the rise of now-familiar terms like “tramp” and “bum.” Unlike these “forgotten men,” Cooke recovered his fortune by investing in a Utah silver mine; he died in 1905, once again a wealthy man.
After being badly burned by the stock market, a generation of investors was scarred. “Depressions linger, because people are afraid to invest,” Gordon says. “We get crashes on Wall Street about every 20 years, because that’s how long it takes people to forget what happened the last time. A generation of new guys think they’re as smart as they come, and then it turns out that they’re human, like the rest of us.”