#86 The Fall of Jay Cooke (The End of Laissez-Faire Part 9)

Read Part 8 of this Series

Author’s note:

This series of blogposts will be my paraphrased notes on a lecture given by Murray Rothbard called “The American Economy and the End of Laissez Faire“. This means the post will contain some word for word transcriptions of Rothbard’s words and some editorializing and rephrasing of my own. I will not distinguish between the two.

It took many cities in the United States a number of years to get cable providers in the 20th century, this was due to businesses fighting over who would be granted regional monopoly privileges to service a particular areas.

Instead of both businesses competing against one another in free market competition, each one fights fiercely for the rights to a monopoly.

Rothbard tells a story about a cable monopoly in Tucson AZ, observed two cable companies fighting for the monopoly franchise. A couple of city council members pleaded for a secret ballot on the approval because they were receiving money from both companies, but they were embarrassed when made to vote publicly.

The definition of an honest politician is one who stay’s bought.

To return to Jay Cooke and Company, Cooke gets from the Northern Pacfic it’s fiscal agency. Which is, the sole power to underwrite its bonds and stocks. He charges a 12% commission, about was about double the normal commission, to underwrite for his own company, thus defrauding his shareholders.

Get your investment bank to underwrite for your railroad of which you own a small part, shift funds quietly (but illegally) from your fellow equity holders to yourself and a couple of others in the bank.

Cooke engineered a large scale Northern Pacific propaganda marketing campaign. His sales agents pushed to both buy Northern Pacific bonds and to settle in the North Western United States. One of the agents whom he brought on later became president of Northern Pacfic. A fairly wealthy German named Henry Mallard.

Very rarely in history does justice triumph. However with Cooke and Company, this is fortunately not the case. Here was Jay Cooke, top investment banker, monopoly underwriter, multimillionaire, owner of Northern Pacific, creator of the national banking system etc…And Northern Pacific railroad begins to collapse.

All of these railroads were run exceptionally poorly. But majority owners never cared because they wanted to fleece the financing structure and defraud shareholders and creditors. After it’s extended mal-investment and over leveraging, both Northern Pacific and Jay Cooke go bankrupt. Cooke essentially put himself out of business by his own greed. He caused the inflationary boom of the late 1860s and 1870s with his avarice, and when the deflationary collapse came (which it always does in these cases) it took him out for good.

After Cooke goes bankrupt, Mallard becomes head of Northern Pacific and attempts to save it. By 1873, the railroad land grants had all dried up, there were no more following the panic, which ultimately led to Northern Pacific going bankrupt in the late 70s.

Cooke, of course, was a Republican. He was involved with Salmon P Chase, the Lincoln administration, the Grant administration. Cooke’s place is subsumed in investment banking by another Philadelphia company called Drexel Morgan and Company [sic]. This is the beginning of the famous rise of JP Morgan’s fame and fortune, and Anthony Drexel is of the famous Philadelphia financial and banking family (Drexel and Biddle family).

Morgan was the son of a British banker. Morgan was younger than Drexel and yet quickly took over the company (at which point it ended up becoming J P Morgan and Company). So the result of the fall of Jay Cooke is the rise of J P Morgan.

From 1873 (the panic of 1873 and the collapse of Cooke) onward, J P Morgan was a powerhouse in the American political arena. Morgan was a Democrat, although he also later became a member of the New England wing of the Republican party later on.

The one railroad that did make it (without any government subsidy) was The Great Northern which started in Deluth, Minnesota and skirted the Canadian border all the way to Seattle, Washington. Even though there were only a few transcontinental railroads, they all competed with one another for transportation of goods and people. The Great Northern was completed around 1870 and was mostly in competition with Northern Pacific. It was organized by James J Hill (the last of the great rail magnates).

Hill was born in Canada, dirt poor in a log cabin. He came from a Scotch Irish farm in Ontario, was uneducated and became a clerk. He emigrated to Minnesota after turning 18. He began by buying out small bankrupt railroads, and began making them more efficient.

His first was a small railroad called St. Paul Minnesota Manitoba railroad, it was quite small. He specialized in cheap freight rates, large volumes, and competitive service. There was no phony construction company designed to embezzle money out of the business and he did not underwrite any bad loans to steal from equity partners.