Jay Cooke

American financier

• Born: August 10, 1821
• Birthplace: Erie County (now Sandusky), Ohio
• Died: February 18, 1905
• Place of death: Ogontz, Pennsylvania

The foremost investment banker during the mid-nineteenth century, Cooke pioneered new ways of mobilizing the savings of Americans for productive ends. His banking innovations made possible many of the great financial undertakings of his time.

Early Life

Jay Cooke was the third son of Eleutheros and Martha Cooke, who had relocated in several moves from New England to the Lake Erie settlement of Sandusky. Eleutheros was an ardent Whig politician and served in Congress for a term when Jay was a young boy. The family atmosphere was devoutly Protestant. Jay attended public school in Sandusky until the age of fourteen, when he ended his formal education and took a job as a clerk in a general store.

After a year at work, Cooke left Ohio for St. Louis, staying there a year, until the commercial disruption following the Panic of 1837 caused him to return to Sandusky. Still only sixteen, Cooke left Sandusky in the spring of 1838 for Philadelphia, where he obtained work with his brother-in-law’s canal transport company. The firm failed shortly after Cooke’s arrival in the city, and he returned once more to Sandusky, staying only a few months, until he was lured back to Philadelphia with a job offer from the banker E. W. Clark. From 1839 to 1857, Cooke worked in the Clark banking house, first as an office boy; soon, because of his head for figures and nose for profits, he became a partner at the age of twenty-one.

An early photograph taken of Cooke during the 1840’s shows a young man of modest stature, clear eyes, and somber nature. He looks as if he were trying to look older than he was. This fits the character of the man: earnest, sober, deeply religious, and a family man. Cooke took his older brothers, Henry and Pitt, into partnership when each needed money and supported them throughout numerous misadventures for most of their lives. He started his own family shortly after his 1844 marriage to Dorothea Allen, and the couple had eight children, though not all survived childhood. The Cookes did not entertain extensively, keeping the Episcopal Church at the center of their lives.

As a partner at E. W. Clark and Co., Cooke practiced mercantile banking as it existed before the Civil War. The profits of the firm came from dealing in “domestic exchange,” that is, bank notes from various parts of the country that the firm discounted according to risk. The nation in those days had no official government currency except metallic money, so the paper medium of daily exchange was provided by private bankers. With the bank notes of so many banks in circulation, the banker had to judge shrewdly the worth of the paper that purported to be “good as gold.” The firm also lent money for short periods of time to Philadelphia merchants and engaged in the commodity trade.

As Cooke prospered at E. W. Clark and Co. during the 1850’s, he began to invest his own money in a number of outside ventures. These included a daring land speculation in Iowa and Minnesota that originated as a project to give work to his bankrupt brother Pitt. Cooke sent Pitt west to the Iowa prairies to obtain land from the government at prices below $1.25 an acre, with careful guidance about how to resell it to incoming farmers at three and four dollars an acre. The speculation made so much money that Pitt paid his debts and Cooke became even more wealthy. Growing restless as a junior partner at E. W. Clark and Co., he left the firm in 1857 and devoted his attention to private investing, particularly in railroads, for the next few years. He decided to reenter the banking business on the eve of the American Civil War and opened Jay Cooke and Co. on January 1, 1861.

Life’s Work

President Abraham Lincoln took office to find the national treasury nearly empty, and with the firing on Fort Sumter, he faced a greater challenge in raising money than in raising volunteers to fight in the Civil War. Wars are expensive to fight, and governments can finance them either by taxation, borrowing, or printing paper money. The Confederate government in Richmond chose the last option and, by the end of the war, the Confederacy had an inflation rate of 5,000 percent. The Union government of Lincoln chose to borrow to pay for the war, a better strategy, but one that worked only because of the efforts of Jay Cooke.

The traditional method of government finance was to offer government bonds at competitive auction to private bankers. This practice worked well enough in peacetime, but in 1861, many bankers were unsure whether the Union would survive to pay the debt. Secretary of the Treasury Salmon P. Chase insisted on selling the bonds at par (one hundred cents on the dollar), but most bankers considered them to be too risky at that price. The Treasury and the nation muddled through 1861, unable to raise enough money but uncertain of any other way of doing business. Cooke, however, had an idea about how to raise hundreds of millions for the war effort.

Through his older brother Henry, a Washingtonjournalist, Cooke approached Secretary Chase and offered to be the government’s sales agent for government bonds. For a small fee, Cooke promised to sell all the bonds that the government could issue. He based this confident assertion on his earlier experience as the fiscal agent for the state of Pennsylvania in selling a bond issue of three million dollars. He had simply marketed the bonds directly to the public at par, bypassing other investment bankers.

As the war turned against the Union during the summer of 1862, Chase became more receptive to Cooke’s idea, if only out of desperation. In October, the secretary appointed Jay Cooke and Co. sole agent to sell fifty million dollars of government bonds at 6 percent interest. The bonds were due in twenty years, but the government could redeem them in five, hence the popular name of the debt was “5-20’s.” Cooke promised to sell a million dollars a day of 5-20’s and took a fee of one half of 1 percent, on the first ten million dollars worth sold, and 0.375 percent on the remainder.

Cooke faced two challenges in selling the debt. First, he had to build a distribution network of retail sales agents to sell the bonds, and second, he had to persuade the public to buy them. In each case, he was spectacularly successful. Cooke appointed twenty-five hundred subagents to sell bonds throughout the Union and, by using the telegraph, effectively coordinated the efforts of this sales team. A heavy use of newspaper advertising and handbills worked to convince the public of the patriotic necessity of buying government bonds. Any Northern newspaper of 1863 was likely to carry a prominent ad placed by Cooke urging citizens to buy bonds.

The sales campaign began in earnest in February, 1863, and by the end of June, Cooke had marketed more than $175 million in 5-20’s. Over the next seven months, until the loan was oversubscribed by late January, 1864, he sold more than $325 million. After paying advertising costs, office expenses, and commissions to the subagents, Cooke was left with a commission of perhaps one sixteenth of 1 percent of the sales. He did not get rich selling the bonds; rather, he earned something even greater, the title Financier of the Union.

The government bond business made Jay Cooke and Co. the best-known banking house in the United States, and this when Cooke was still in his early forties. In 1865, he repeated his earlier coup in helping the government to finance a new issue of bonds, the so-called 7-30’s. This loan drive was even more extensive and more successful than the 1863 issue of 5-20’s. From January, 1865, through the end of July of that year, Cooke managed to sell more than $800 million worth of new government bonds. The sales force was more than double that of the earlier sale, and for the 7-30’s, Cooke even had itinerant salespeople follow the progress of the Union Army in the South to sell the Union public debt to the conquered rebels.

For several years after the war, Jay Cooke and Co. engaged in further government debt financings. By 1869, the government finance business had wound down and opportunities for profit appeared elsewhere. Cooke had some antebellum experience in railroad finance, and it was in this direction that he took his firm in 1869. That year, he agreed to be the banker and agent for the Northern Pacific Railway Company , a line projected to link Lake Superior with Puget Sound on the Pacific. The nation had just completed one transcontinental railroad in the Union Pacific-Central Pacific, linking Omaha to San Francisco, but the Northern Pacific promised to be the largest construction project in American history.

Cooke was attracted to the Northern Pacific for a number of reasons. He had speculated in Minnesota lands during the 1850’s and believed in the future of the Northwest. He renewed his land speculation near the tiny settlement of Duluth in 1866, and when he visited the place in 1868, he saw it as the next Chicago, a mighty future metropolis handling the produce of the American West. Early in 1869, Cooke sold bonds for the Lake Superior and Mississippi Railroad, linking Duluth to St. Paul, and the success of that venture persuaded the investor to take on the Northern Pacific’s tasks of raising capital to build the two-thousand-mile railroad.

The original financing plan intended for the Northern Pacific to build westward in anticipation of the traffic along the line. This, together with land sales from its magnificent fifty-million acre land grant from Congress, would finance further construction, operations, and debt service. This plan proved too optimistic, because there was almost no white settlement along the route. Cooke managed to raise five million dollars for construction in 1870, but only with great difficulty. His efforts to interest European bankers and investors failed, as they thought the Northern Pacific too risky.

In 1871, Cooke began a public campaign to sell $100 million in Northern Pacific bonds at 7.3 percent interest, the goal of the drive being to raise enough money from small investors to complete the road. Cooke used the same techniques he had learned in selling government bonds during the war: a nationwide network of subagents and hundreds of thousands of dollars spent on advertising. Indeed, Cooke made the Northern Pacific bond-selling slogan, “Safe! Profitable! Permanent!” ubiquitous in the country in 1871 and 1872. The results, however, were disappointing. Cooke only sold about sixteen million dollars worth of bonds in 1871 and 1872. The investing public judged the Northern Pacific too risky an enterprise, despite the high interest rate offered and the reputation for reliability that Cooke brought as the railroad’s banker.

Gradually, Cooke crossed the line between banker and promoter of the Northern Pacific. The railroad repeatedly overdrew its account with Cooke’s bank and showed signs of mismanagement. The road’s problem was that in its first few years, it had substantial expenses and little revenue. The Cooke banking houses in Philadelphia, New York, Washington, and London became overextended in Northern Pacific affairs by 1872, and when a tightening of the money market in 1873 pressed banks in general, Jay Cooke and Co. was forced to close its doors: It no longer had sufficient reserves to pay the demands of its depositors. The shock of the failure of the leading private bank in the United States caused a panic on Wall Street and ushered in the worst business recession Americans had experienced to that date.

Cooke declared bankruptcy in 1873 and lost most of the multimillion-dollar fortune he had accumulated. He spent the next several years satisfying his creditors, and by 1880, he resumed business as an investor in Western mining ventures. He made a second fortune before his death but preferred to live a quiet life as an old man devoted to family and church. He died in Ogontz, Pennsylvania, in 1905.

Significance

Jay Cooke performed three great services in his adult life as a banker. First, he earned the title Financier of the Union because he came to the rescue of an empty Treasury at a critical time in the Civil War. Had Cooke not successfully sold the 5-20’s to the public in 1863, the Treasury would have probably had to resort to extensive printing of paper money, much as the Confederates did. The result would have been ruinous inflation and perhaps a different outcome to the war.

Second, even though Cooke failed in his endeavor to make the Northern Pacific a money-maker during the early 1870’s, he did succeed in getting the road launched, and his vision of the Northwest as a great grain-, timber-, and coal-producing region of free and prosperous Americans did come true. Despite his 1873 bankruptcy, Cooke lived long enough to see his idea of the Northwest emerge as emigrants from the eastern United States and immigrants from Europe poured into the region. While Duluth never became the next Chicago, it developed into the greatest inland grain, coal, and iron port in North America, and the citizens of that city gratefully remembered Jay Cooke’s part in their rise.

Third, Cooke helped change the nature of investment banking. Prior to his financing the Civil War debt, private banking consisted of discounting notes and short-term loans from bankers to merchants. The savings of average Americans were not tapped in any way except through a handful of small savings-and-loan associations. Cooke changed that by reaching out to hundreds of thousands of Americans in the war and appealing for their small holdings to support the cause. In the century following, Wall Street would devote increasing amounts of time and effort to attracting the savings of the individual investor. Without Cooke’s innovation, the great financial undertakings of the day could not have taken place. Without the savings of millions of people, the government debt and the great industrial projects, such as the railroads, could not have been funded.

Bibliography

Cooke, Jay, et al. “Guide to the Lands of the Northern Pacific Railroad in Minnesota.” In The Fruits of Land Speculation, edited by Paul Wallace Gates. New York: Arno Press, 1979. This pamphlet amply demonstrates Cooke’s talent as a promoter. It explains the route of the Northern Pacific and the advantages of moving to the country west of Duluth.

Hammond, Bray. Sovereignty and an Empty Purse: Banks and Politics in the Civil War. Princeton, N.J.: Princeton University Press, 1970. This book examines how the Treasury found itself in desperate condition in 1861, and how it mobilized itself to raise the necessary funds to prosecute the war. The author treats at length Cooke’s relationship to the Treasury.

Harnsberger, John L. Jay Cooke and Minnesota: The Formative Years of the Northern Pacific Railroad, 1868-1873. New York: Arno Press, 1981. Recounts Cooke’s role in financing and promoting the railroad.

Larson, Henrietta M. Jay Cooke: Private Banker. Cambridge, Mass.: Harvard University Press, 1936. This is the standard biography of Cooke, concentrating on his banking career from the 1840’s through the 1873 failure. Among biographies of businesspeople, this is one of the most outstanding.

Minnigerode, Meade. Certain Rich Men. New York: G. P. Putnam’s Sons, 1927. Reprint. Freeport, N.Y.: Books for Libraries Press, 1970. This book consists of biographies of wealthy Americans of the late nineteenth century. The contrast between Cooke and some of his less scrupulous colleagues is noteworthy.

Oberholtzer, Ellis Paxton. Jay Cooke: Financier of the Civil War. Philadelphia: George W. Jacobs, 1907. Oberholtzer was the first to make use of the magnificent Jay Cooke Papers manuscript collection at the Historical Society of Pennsylvania. There is considerable emphasis on the private side of Cooke’s life.

Sinisi, Kyle S. Sacred Debts: State Civil War Claims and American Federalism, 1861-1880. New York: Fordham University Press, 2003. Innovate study of the post-Civil War struggle between the states and the federal government over payment of the $468 million debt left over after the war.

Trescott, Paul B. Financing American Enterprise: The Story of Commercial Banking. New York: Harper & Row, 1961. This book has a good chapter on American railroad finance and puts the Northern Pacific episode in perspective.