Gotham_ A History of New York City to 1898 - Edwin G. Burrows [811]
TAKING STOCK
Reporters besieged Vanderbilt asking what had gone wrong. The ill-tempered Commodore blamed the crisis on excessive railroad promotion. “There are,” he argued, “many worthless railroads started in this country without any means to carry them through.” To raise money, entrepreneurs had turned to “respectable banking houses in New York, so called,” who affixed them with “a kind of moral guarantee of their secureness” and sold the bonds in Europe. But the roads, many of which went “from nowhere to nowhere,” soon got into difficulties. “If people will carry on business in this madcap manner,” he concluded, “they must run amuck.”
Vanderbilt had a point. To convince investors to buy his Northern Pacific Railroad stocks, Jay Cooke had had public relations experts crank out stories that the bleak right-of-way through the Dakota and Minnesota territories was in fact a “vast wilderness waiting like a rich heiress to be appropriated and enjoyed.” Cooke’s campaign formed the basis for Mark Twain and Charles Dudley Warner’s Gilded Age, a satire on boomtime ethics. Cooke enticed some immigrants with his planted fairy tales, but nowhere near enough. Investments fell off. To save his existing stake, Cooke cooked books, corrupted politicians, and milked capital to meet debt payments. Rivals spread rumors of his deteriorating position. Bond sales dwindled to nothing, European creditors called in their notes, and the Northern Pacific went bankrupt, dragging the House of Cooke down with it.
The Northern Pacific’s story, though larger than life, was not atypical. Far more roads had been built than the transport market demanded. Many ran at a loss most of the year, hoping to make up deficits during harvest time’s mass movement of crops to markets. But they could never squeeze enough profits out of the farmers, who, themselves confronting lower commodity prices, vigorously resisted railroad exactions. This left the heavily indebted lines highly vulnerable to contraction elsewhere in the economy.
Another source of strain was the now familiar end-of-boom diversion of capital into speculative channels. Bankers Magazine had fretted at all the money pouring into the call market, pursuing interest rates that ranged from 12 to 24 percent. These funds, in turn, had fueled the sporting of bulls (including Vanderbilt) and bears (such as Gould and Sage). Wall Streeters had become convinced that crises like those of 1837 and 1857 were no longer possible as governmental safeguards had been erected. The secretary of the treasury had been given so much power, said the Herald, that “it is difficult to conceive of any condition of circumstances which he cannot control.”
Among the many things the secretary could not control were the capital markets of Europe. The American rail boom had been sustained by overseas funds, but overexcited European investors had spiraled off into a wild speculative binge, often snapping up absurd or fraudulent prospectuses. One Viennese journalist expected any day to see a company formed “to transport the aurora borealis in pipelines to St. Stephen’s square.” And it was in Austria that the great Panic of 1873 started. It spread to Berlin, jumped to Paris and Amsterdam, then slammed into London. European markets lost interest in American railroad stocks, and it was this, together with seasonally tight money and news of widespread corruption, that brought down the New York market.
Beyond this lay still vaster problems with the global capitalist economy. Since the 1840s it had been powered by the international development of the railway system, which in turn had stimulated coal-, iron-, and steam-based industrialization. In the 1870s the limits of that expansion were reached, and the world economy tumbled into a slump of unprecedented proportions. The U.S. economy, more globally integrated than ever, tumbled with it. The depression would last from its inception in 1873 until a partial recovery in 1879, with effects far more disastrous than those of any slump before it. The fifty-one hundred bankruptcies