Wall Street History
Jay Cooke, Part II
Before we continue our story of Jay Cooke, America''s first
investment banker, and his role in helping to finance the Civil
War, let''s step back and take a look at overall U.S. government
budget practices in the decade prior to the great conflict.
Throughout most of the 1850s, the federal budget was a mere
$50-$60 million a year and there was little debt on the books.
The budget for 1860 then rose to $74 million, with a $10 million
deficit. The overall debt level stood at $90 million.
Then the first shot of the war was fired and Kaboom!.Union
spending soared, hitting an annual level of $1.3 billion by 1865.
The deficit for 1865 was some $964 million and the total public
debt was in excess of $2.7 billion.
Meanwhile, Jay Cooke was anxious to serve his country, and
make a buck at the same time. At the start of the war, his state of
Pennsylvania had decided to sell about $3 million in bonds to
provide for a defense against a potential attack from the
Confederacy. You''ll recall that Jay Cooke and Company had
been established in January of 1861 and, despite his firm''s small
size, he saw an opportunity in the state''s offering.
Cooke went to Pennsylvania officials and convinced them that he
could sell a significant portion of the bonds using patriotism as a
sales tool. The state decided to give Cooke and Company a
chance and divided the sale between them and Drexel (some ten
times the size of Cooke).
Cooke then used the experience he gained while employed at
E.W. Clark in the 1840s and 50s to market the Pennsylvania
bonds. He took out advertisements in the newspapers of the day,
touting the bond''s merits, not only from a patriotic view, but also
from a financial angle. Part of his sales campaign read as
"But independent of any motives of patriotism, there are
considerations of self-interest which may be considered in
reference to this Loan. It is a 6 per cent loan free from any
Believe it or not, any language of this kind was a rarity in those
days, so you can conclude that Cooke also deserves credit for
being the first major "bond salesman."
From a personal financial standpoint, however, Cooke was not
making a bundle on the sale of the paper. In fact, he earned only
pennies on each bond his firm sold. But he had convinced
Pennsylvania officials to name his firm the official state
depository, meaning that Cooke saw large inflows from
customers who deposited their funds with Cooke and Co. in
order to purchase the paper. This gave him working capital, and
that attracted new capital that wasn''t bond related. The
Pennsylvania offering went well and Cooke''s reputation spread.
Before the war, fewer than 1% of Americans owned securities of
any kind. The mattress was the place for any surplus cash.
[Hopefully, some folks were smart enough to hide it elsewhere,
seeing as everyone knew where everyone else''s money was.] By
the end of the war, though, Jay Cooke, alone, had sold bonds to
about 5% of the total population of the North.
At the start of the war, there was one official who was having a
real tough go of it, that being Treasury Secretary Salmon Chase.
You''ll recall from Part One that Chase had a relationship with
both Jay and his brother Henry, the latter Cooke being firmly
ensconced in the treasury department as an aide to Chase.
After the Battle of Bull Run, President Lincoln and Secretary
Chase saw the need for immediate funding. The Union raised
$50 million in a bond issue but it was a mighty struggle and,
clearly, the need existed for far more, specifically, at least $240
On July 12, 1861, Jay Cooke approached Chase and told him he
would open an office in Washington. Cooke then instructed his
brother Henry to tell the treasury secretary, "that I hold myself at
his service and, pay or no pay, I will do all I can to aid him in
Treasury matters. I feel, however, that if he would give me a
chance I could show him a way to raise the money."
Cooke opened his Washington office in February of 1862 at a
critical time for the Union. England and Europe were turning
against the North and military defeat by the Confederacy was not
out of the realm of possibility. What this meant, of course, is
that any hope of financial support from abroad was mostly a pipe
dream. If Lincoln was unsuccessful in holding the Union
together, the North wasn''t a good investment. It was Jay Cooke
Cooke quickly put together a nationwide sale force of some
2,500; comprised of small town bankers, insurance salesmen, and
real estate dealers. Now you may be thinking to yourself, how
the heck did Jay Cooke maintain such an unwieldy sales force
with communication being what it was back then? Glad you
Cooke employed the telegraph to coordinate sales throughout the
country. As market historian Charles Geisst thus concludes, Jay
Cooke and Company was the first "wirehouse" in using the
telegraph to confirm purchases and sales of the bonds; a method
that would be employed in the future for all security sales.
Cooke''s advertising once again stressed patriotism, the potential
for profit if the Union won, as well as the safety of U.S.
government obligations. More specifically, Cooke was selling
what came to be called "five-twenties," so named because they
could be redeemed in not less than five years or more than
twenty, meanwhile paying six percent interest in gold. A bond
buyer was therefore betting both that the federal government
would survive and also that the Treasury would be sitting atop
enough gold to pay off its borrowings.
Aside from his innovative advertising efforts, Cooke also
convinced Secretary Chase to issue the bonds in denominations
as small as $50, helping to ensure that the potential market
was the majority of Americans. By early 1864, Cooke and Company
had sold some $360 million of government obligations. He had
done his duty.
You''ll be amazed to learn, however, that for all of his efforts, Jay
Cooke made only about $200,000 off of the $360 million he was
responsible for selling (one-sixteenth of one percent), but the
exposure he gained helped to establish Jay Cooke and Company as
a giant in the financial arena. And, as you can imagine, the real
money was made in the aftermarket for the bonds, where Cooke was
by far the largest player, thus enabling his company to control all
facets of it. As we will see next week, though, this same technique
was used in his attempt to corner the market on railroad bonds. It
proved to be a fatal mistake.
Finally, let me digress a bit to fill you in on the first real federal
income tax in history, the Internal Revenue Act of July 1, 1862.
This 20,000-word document was meant to create a revenue
stream to supplement the funds that were raised mostly from the
government''s bond offerings.
The Act established a system whereby basic manufacturers were
taxed 3%, while luxury goods paid higher taxes. At the same
time the income tax was established at 3% on incomes between
$600 and $10,000 and 5% on amounts over $10,000. [On June
30, 1864, the rates were raised again to 5% on incomes from
$600 to $5,000, 7.5% on incomes from $5,000 to $10,000, and
10% on incomes over $10,000.] But the income tax was less
than 20% of total government revenues.
Next week, Jay Cooke and the Panic of 1873.
Charles Morris, "Money, Greed, and Risk"
John Steele Gordon, "The Great Game"
Charles Geisst, "Wall Street: A History"
Robert Sobel, "The Pursuit of Wealth"
Russell Weigley, "A Great Civil War"