Gotham_ A History of New York City to 1898 - Edwin G. Burrows [675]
The ill effects of this adverse balance of payments, the fiscally astute James Gordon Bennett noted, had been staved off by exporting California gold and importing European capital. But this precarious equilibrium had begun to wobble in the mid-1850s, when Europeans had begun to cut back sharply on investment in the midwestern railroad boom. Capital transfers to the United States dropped from fifty-six million dollars in 1853 to twelve million dollars in 1856. Partly this was in intelligent response to signs of an overheated American economy; the Barings started to liquidate their holdings after the 1854 mini-crisis, and British funds shuttled into less speculative, often more remunerative English securities. The money was also needed at home for imperial expenses: the Crimean War, campaigns in China and Persia, and the suppression of the Indian Mutiny of 1857. The selloff helped drive down the price of shares on the New York Exchange, which in turn weakened the American banking system by reducing the value of assets supporting it. Bennett feared that the drying up of European capital might force the railroads into bankruptcy, then drag down the poorly capitalized banks. “What can be the end of all this,” he wrote before the crisis, “but another general collapse like that of 1837, only upon a much grander scale? The same premonitory symptoms that prevailed in 1835-6 prevail in 1857 in a tenfold degree.”
Bennett, Greeley, and many others put particular emphasis on the overbuilding of the railroad system. The expansion had been at the core of prosperity but the free-forall way the job was done undermined that prosperity. Railroad company promoters issued vast amounts of watered stock, way beyond what actual assets or dividends could support. Legislatures were pressured (or bribed) into granting charters, buying bonds, and donating land to underwrite the construction of unnecessary and overlapping lines. Promoters formed construction companies and awarded themselves contracts, siphoning off profits.
The superheated expansion—pointed out J. S. Gibbons in his 1859 postmortem, The Banks of New-York, Their Dealers, the Clearing House, and the Panic of 1857—had been underwritten by a too liberal granting of credit, engineered by the new banks and the booming Stock Exchange. Between 1851 and 1853 alone, twenty-seven new banks had been established, most of whose aggregate capital of over sixteen million dollars was fictitious book debt. Nevertheless, the banks attracted new deposits, upon which they issued additional credit, until by August 1857 over forty million dollars were out in loans, a good two-thirds of which Gibbons deemed ill advised.
Easy money encouraged speculation: as the boom wore on, greater profits were to be won by financing, promoting, and speculating in railroads than by building them. “All confidence is lost, for the present, in the solvency of our merchant-princes—and with good reason,” wrote Strong, as “it is probable that every one of them has been operating and gambling in stocks and railroad bonds.” Speculation spilled easily into manipulation; men like Jacob Little made fortunes in short selling, arranging rumors to drive stock prices down, and then clean up. (Bennett’s warnings were in part ignored because he was associated with Leonard Jerome, who, as a bear, stood to benefit if stock prices were driven down by gloomy prognosticators.) From manipulation to straightout corruption was but a short and easy step. Editor Freeman Hunt grew convinced that it was now necessary “to deal with every man and woman, so far as business is concerned,