4.2. JAY COOKE AND THE CRASH OF 1873

Cooke had rigorously studied the plans and personally surveyed much of the route before he agreed to become involved in such a large undertaking.  During this process, he was convinced that Duluth would ultimately become the next Chicago with a corresponding real estate boom, so he poured his vast experience and fortune into the railroad project.  Construction began in Duluth in July 1870, only days before France declared war on Prussia.  Unfortunately for Cooke, and most of the world, the coming events following the Prussian victory would cast a long shadow.  One of the main requirements that Bismarck included in the Treaty of Frankfurt, that formally ended the hostilities on May 10, 1871, was that France was required to pay an indemnity in gold of 5 billion francs to Prussia within five years.  The Prussians reminded the French that this was the exact same amount that Napoleon I had imposed on Prussia following his victory over the Prussians in 1806. While this was intended to hobble the French economy for a generation, Bismarck appears to have “gone one step too far” in his next move in December 1871.  Having assured that France would be drained of a good quantity of its gold, that was to be deposited into the new German treasury (the German Empire had just been declared on January 18, 1871), he then proceeded to rub salt into the wound by demonetizing silver.  That is, Germany would no longer mint silver coins: it was adopting the gold standard that would initiate a corresponding drop in the value of silver not just in France, but worldwide.

Meanwhile, Cooke had been out in the hinterland, trying to sell the NP bonds in order to raise cash for its construction company that in truth, was being run as a kickback scheme by the company’s Directors, similar to how Durant was running the Crédit Mobilier.  In other words, what was already a tough sell, a railroad through a land inhabited only by hostile Native residents (Gen. George Custer’s last stand at the Little Bighorn was still five years in the future) that was also inundated with a mountain of snow for sometimes months on end, was being made only the more difficult for Cooke by the extravagant construction contracts made by the company’s Directors.  Just as Cooke was about to offer over $300 million in new Northern Pacific bonds to finance the next phase of its construction, President Grant signed the Coinage Act of 1873 on February 12, 1873, in response to Bismarck’s demonetization of silver.  The U.S. was de facto also going on the gold standard and the value of silver in the U.S. would correspondingly drop, reducing the country’s money supply (with a corresponding increase in interest rates), and forcing potential investors to shy away from any new long-term obligations, including Cooke’s Northern Pacific bonds.  Cooke attempted to maintain the perception that the demand for the bonds was strong, by buying the bonds first with his own money, something that even his deep pockets could not support for very long, and then, with the deposits that his customers had placed in his bank.   Rumors began to circulate about the solvency of his bank, and a panic hit the streets of Philadelphia on September 18, 1873, only one week before the scheduled grand opening of Chicago’s Inter-state Industrial Exposition Building.  Cooke’s house of cards had collapsed and Jay Cooke & Co. was bankrupt.  Trading on Wall Street was suspended two days later for the first time in its history, for the next ten days so as to try to get a handle on the crisis.  The bank failure rippled through the nation and resulted in the Great Depression of 1874-79 that mercilessly ended Chicago’s post-fire reconstruction almost as quickly as it had begun. 

4.3. VANDERBILT GAINS CONTROL OF THE ROUTES TO CHICAGO

The 1873 Panic would also have a direct impact on Chicago’s overall urban pattern, as the financial crisis would eventually allow Vanderbilt to also buy the Michigan Central right out from under the noses of its Bostonian builders through a series of clever stock manipulations.  On September 22, 1875, the Chicago Tribune had reported on the ongoing battle raging between Boston and New York:

“There is hardly any doubt that the reports about Vanderbilt having secured a controlling interest in the line (Michigan Central) are correct…The election of Mr. Sloan to the directory, the substitution of Wagner’s sleeping cars in place of Pullman’s, and the removal of the headquarters of the road from Boston to New York prove that Vanderbilt is handling the reins…. In connection with this, it is rumored that Vanderbilt is also negotiating for the purchase of the Canadian Southern Railroad, which at the present time can be had very cheap.  It is believed that Vanderbilt has long had an eye on these lines so as to control all the Northwestern business and prevent Boston from making use of the Hoosac Tunnel as a direct route to the West.

Vanderbilt’s acquisition of the MC had not only severed the eastern link of the Bostonians’ highly profitable Chicago, Burlington and Quincy Railroad, its western link to Council Bluffs and the Union Pacific, but had also gained Vanderbilt a virtual monopoly of all rail traffic along the Great Lakes between Chicago and New York (the Pennsylvania’s route not only was farther south of the Great Lakes but also had to pass through Philadelphia on its way to New York).  As the Union Pacific was still the only transcontinental route at this time, Vanderbilt’s monopoly had even broader implications: he held a monopoly over the rail outlets for midwestern wheat and meat to New York City.  The only route along the Great Lakes from Chicago to New York that escaped the Commodore was the Canadian Grand Trunk Railroad, yet even it had to rely on Vanderbilt’s good will to use the Michigan Central’s tracks to enter Chicago.  Vanderbilt could at any moment, without warning, simply close this off and control all rail traffic between New York and Chicago (that his son would do in the near future).

(If you have any questions or suggestions, please feel free to eMail me at: thearchitectureprofessor@gmail.com)

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