American Experiment (166 page)

“A happy New Year to you, my beloved husband!” Susan Sedgwick of Stockbridge had written in the early days of 1828 to Theodore Sedgwick, who had just proposed the building of the Boston & Albany Railroad at state expense. “May it preserve to you all your blessings, multiply your strawberries, extend your grapes,
&
build your
RAILROAD!”
Amid failing health and jeering skepticism, Sedgwick had seen the line extended from Worcester to Springfield before he died.

Not even the trials and tribulations of railroading, however, could compare with the agonizing problems and dizzying profits of Boston’s greatest feat—opening up the copper lodes of Michigan. Mined by Indians for arrowheads and ornaments long before Columbus, the copper deposits lay in a small peninsula jutting out into Lake Superior. Everything seemed to conspire against profitable investment: the isolation of the copper country; the cost of shipping copper by lighters and shallow vessels on Superior’s waters, and then of unloading and reloading at Sault Sainte Marie; crude mining techniques that had miners digging by candlelight, hauling carts by their own labor, climbing up and down 100-foot ladders. But the Bostonians persevered, raising more capital and enlisting governmental aid. Their men on the peninsula installed steam hoists and pumps, modernized stamping and washing processes through “much trial-and-error fumbling” in William B. Gates’s words, and eventually solved the “special problems of the native, low-content rock.” Nevertheless, a host of old Bostonians lost their starched shirts as mines folded in the face of heavy costs and unstable world demand.

Then persistence paid off for some in the discovery of sensational lodes at the Calumet and Hecla properties, later combined. Louis Agassiz, already renowned as a Harvard naturalist, reported to his brother-in-law, Quincy Adams Shaw, that with some of the lodes yielding an incredible 15
percent of copper, the value of Calumet and Hecla was “beyond the wildest dreams of copper men.” Between 1867 and 1872 the percentage of Michigan copper shipped by Calumet and Hecla rose from 8 to 65.About eight hundred predominantly Boston stockholders waxed for years on Calumet and Hecla dividends; owning C & H became a mark of financial perspicacity and a badge of social status. Some of the shareholders were far more equal than others in the huge fortunes they extracted from the mines; for decades the Shaws alone mined yearly dividends of almost $300,000 from the distant lodes on Superior.

Still, it was railroading that seemed most to arouse the avarice and passions of Boston investors. John Murray Forbes, who had returned home from China at the age of twenty-four after making a fortune in Canton representing a Boston countinghouse, came to exemplify the bold “general entrepreneur” defined by Thomas C. Cochran as owning a big share in many ventures but tying himself down to none. Reluctant at first to break away from the world of seafaring and trading, he eventually plunged into railroad investment, led a group of capitalists in buying the unfinished Michigan Central Railroad from that state for $2 million, pushed the Central to Lake Michigan and then to Chicago, and thereafter carried his little empire farther West to the Mississippi River and across Iowa.

Some of these railroad leaders were self-made men; Chester W. Chapin, with only a few years of schooling, owned an ox team, tended bar, and operated steamboats on the Connecticut, before making enough money to promote western New England railroads and head the Boston and Albany. Most of the railroaders, however, were “college men” knit by family membership or close friendship into the economic and social elite of Boston. Many did their investing through Lee, Higginson, which in itself united a host of old New England families. It was to Henry Lee Higginson, a fellow Union officer who proudly bore a Confederate saber cut on his face, that Charles F. Adams, Jr., would turn for solace and advice.

Within a decade or two of Appomattox, however, the old entrepreneurial spirit seemed to be dying out in Boston. Thomas Gold Appleton honored his father Nathan for building a vast fortune out of shipping and textiles, but he could not emulate him. Thomas, a Harvard man, had no interest in moneymaking and liked to spend his time abroad writing poetry, painting, and composing essays. His despairing father might well have wondered: Would John Adams have approved of
this
kind of third generation? Capital tied up in family trusts, according to Frederic Jaher, was often unavailable for new and bold business ventures. Men now concerned more with promoting education, religion, and the arts were increasingly distanced from the rough and grimy world of railroads, copper,
and iron. Perhaps the most poignant symbol of all this was the fate of Daniel Waldo Lincoln, Chapin’s successor at the Boston and Albany, who fell from the observation train while watching the Yale-Harvard boat race in 1880 and died.

Financial Boston seemed to be stagnating too, by the 1870s. The “hub” had long since lost out to New York and Philadelphia as a capital market. Manhattan’s booming savings banks, insurance companies, and large and efficient investment banking and brokerage agencies had made it the real financial hub of the nation. The availability of ready “call money” in New York attracted millions of speculative dollars. Philadelphia, Baltimore, and Charleston, with their own ports and transportation facilities, shared in the expanding prosperity while Chicago, St. Louis, Cincinnati, and other “western” cities were racing ahead of the old New England centers.

It was A. Lawrence Lowell, himself a descendant of brilliant entrepreneurs, who had the last word, remarking to his fellow Brahmin George Cabot, “I’m getting rather worried about the Lowell Family, George. There’s nobody in it making money any more.”

Some persons seemed to have a special knack for making money—and also for losing it. These were the private bankers of New York and Philadelphia and other cities, an old-fashioned breed of men who were taking on new importance and becoming known as investment bankers. Private banking had long attracted entrepreneurs. Jacob Barker, a New York merchant and shipowner, at the age of thirty-six had founded the Exchange Bank on Wall Street with a capital investment of $250,000—a bank of which he was the sole owner—during the dying months of the War of 1812. During that war also, Stephen Girard of Philadelphia, another sea trader, became one of the nation’s first investment bankers when he helped underwrite a government loan. Following in his footsteps, Nicholas Biddle undertook a full-fledged investment banking business by contracting and negotiating securities. Some of these and other ventures flourished, some failed, but by mid-century the investment banker—essentially a middleman between corporations and governments issuing securities and those corporations, banks, and insurance companies needing long-term capital funds—had become a vital part of the financial system.

War vastly swells the demand for big money quickly raised, and the Civil War was no exception. The need called forth the man—Jay Cooke. Son of an Ohio congressman, Cooke had left school at fourteen, probably more from ambition than need, to clerk in a general store in Sandusky, then in a wholesale house in St. Louis, a transportation company in Philadelphia, and a banking house in the same city. There, on New Year’s Day in 1861, he opened his own banking house, Jay Cooke and Co. Through old Ohio
and family connections with Secretary Chase, he gained an option to sell a $2 million bond issue in Pennsylvania. He did this so successfully that he was picked to peddle war bonds for the federal government.

Cooke soon proved to be a genius at the mass merchandising of these bonds. Immensely self-confident, still in his early forties, he used patriotic appeals, newspaper advertisements, and a large corps of field agents to sell “five-twenties”—a 6 percent loan payable between five and twenty years. He took the lead in raising half a billion dollars by 1864, and another $600 million in 1865. Perhaps a million Americans took shares in the public debt. A “creative entrepreneur,” in Fritz Redlich’s words, he vividly demonstrated the potential role in big government and business for multitudinous small pools of savings.

Private banking mushroomed after the war, enormously expanding the pool of investment money. By the early 1870s, over five hundred private banks were established in New York City, over a hundred more in Boston, Philadelphia, and Baltimore together, and hundreds more throughout the country, with a remarkably high number in the western states. Many of these were tiny local banks, but increasingly dominant were the big investment bankers, centered in Wall Street, who alone or with other houses could float whole issues of securities. Some of these firms bore “old” names, such as Morton, Bliss & Co., with roots in ancient mercantile establishments. Others sported new names; the field seemed open to anyone with money and daring. Then there were the “Jewish” houses, as they were viewed, such as J. and W. Seligman and Co. and Kuhn, Loeb, with major foreign contacts. Attracting more and more attention in Wall Street by the 1870s was “young” J. P. Morgan, scion of the famous Junius Morgan of London, the American banker who had won world fame when he coolly placed a $50 million loan for the French during their war with Prussia, in the face of thunderous warnings by Bismarck.

Far more typical of American firms was Morton, Bliss, which left extensive records of its week-to-week activities in the letters of junior partner George Bliss to his senior, Levi P. Morton, who liked to linger in London and Newport. Life at Morton, Bliss was one of constant vigilance—following the securities market, closely watching competitors, picking up rumors, mingling with the bigger financiers, keeping an eye cocked on Washington. The firm had major foreign connections through its English partner, Sir John Rose. Like many other financiers, Morton doubled as a politician; he ran three times for Congress and won twice, and established close ties to the Grant Administration. (He would later serve as Minister to France, Governor of New York, and Vice-President.) But Presidents were temporary conveniences, not permanent allies. When Hayes succeeded Grant,
Bliss wrote a friend that “our position with the new administration” would be “not less favorable (and it should be stronger) than with the last.”

Financiers lived day and night in the heady world of Wall and Broad Streets. After feverish bidding in the exchange, men would repair to Delmonico’s for more talk of finance, or they might thread their way through the long narrow alley that led to the plain but fashionable Dorlon’s and its oysters. When the exchange closed at four, some would move uptown for decorous carriage-riding in the new Central Park, or for spirited trotting up in Harlem Lane. But, from fear and excitement and avarice, the financiers could not escape the market; many would return around six to the “Gold Room,” a combination informal exchange and Republican party headquarters, where they kept on trading, sometimes around the clock.

These were enormously self-confident men. However watchful and even fearful they were from day to day in the market, they were also confident of the system that needed only their dynamic leadership. They could take pride, if they paid attention, in the tributes of old adversaries as well as new. “The bourgeoisie,” the
Communist Manifesto
had proclaimed, “during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of nature’s forces to man, machinery, application of chemistry to industry and agriculture, steam navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalization of rivers, whole populations conjured out of the ground—what earlier century had even a presentiment that such productive forces slumbered in the lap of social labour?”

From the perspective of a half-century later, Joseph Schumpeter would picture, as the true economic leaders, the entrepreneurs of this creative period of capitalism. They had to overcome environmental resistances ranging from simple refusal to finance a new thing to “physical attack” on the man who tried to produce it. “To act with confidence beyond the range of familiar beacons and to overcome that resistance requires aptitudes that are present in only a small fraction of the population and that define the entrepreneurial type as well as the entrepreneurial function,” Schumpeter said. “This function does not essentially consist in either inventing anything or otherwise creating the conditions which the enterprise exploits.
It consists in getting things done.”

The investors got things done. In particular, they largely financed the expanded “forces of production” that Marx celebrated. But did they innovate better products, or better ways to make products? Critics charged that the investors were reluctant to subsidize innovation, that they preferred the safe old ways. The trend toward bigger businesses, Thorstein Veblen
said later, and toward control by men with commercial rather than technical skills had led to a failure to innovate. Others disputed this view. But what does seem clear is that investment in innovative industry was on the whole safer than many of the entrepreneurs realized. The individual investor did run risks; but collectively the bankers and other investors could hardly fail in late nineteenth-century America.

One reason for this was the tariff, which was designed particularly to protect “infant industries.” Another was the patent system. Hardly an entrepreneur operated in this period save in a flurry of patent applications, patent claims, and patent suits. Patents, to be sure, were also a source of uncertainty, with some judges defining patents held without use as deserving little recognition in law and none in equity, and others defining them as an inviolable property right whether the discovery was used or not. But the patent system at least set up rules of the game that gave some protection to capitalists financing innovation. What primarily made risk-taking safe in post-Civil War America, however, was the enterprise system itself and the environment in which it operated. That system established multiple channels for investors: if one venture failed, another would succeed. And the environment minimized “interference risks” from a government that largely kept hands off, a labor force that was largely passive, and consumers who were largely unorganized.