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FINANCIAL HISTORY of the UNITED STATES a FINANCIAL HISTORY of the UNITED STATES

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FINANCIAL HISTORY of the UNITED STATES a FINANCIAL HISTORY of the UNITED STATES A FINANCIAL HISTORY of the UNITED STATES A FINANCIAL HISTORY of the UNITED STATES Volume I From Christopher Columbus to the Robber Barons (1492 -1900) Jerry W. Markham M.E.Sharpe Armonk, New York London, England Copyright © 2002 by M. E. Sharpe, Inc. All rights reserved. No part of this book may be reproduced in any form without written permission from the publisher, M. E. Sharpe, Inc., 80 Business Park Drive, Armonk, New York 10504. Library of Congress Cataloging-in-Publication Data Markham, Jerry W. A financial history of the United States / Jerry W. Markham. p. cm. Includes bibliographical references and index. Contents: v. 1. From Christopher Columbus to the Robber Barons (1492–1900) — v. 2. From J.P. Morgan to the institutional investor (1900–1970) — v. 3. From the age of derivatives into the new millennium (1970–2001) ISBN 0-7656-0730-1 (alk. paper) 1. Finance—United States—History. I. Title. HG181.M297 2001 332’.0973—dc21 00-054917 Printed in the United States of America The paper used in this publication meets the minimum requirements of American National Standard for Information Sciences Permanence of Paper for Printed Library Materials, ANSI Z 39.48-1984. ~ BM (c)10987654321 For Mollie and Sean I have but one lamp by which my feet are guided, and that is the lamp of experience. I know no way of judging of the future but by the past. —Patrick Henry, March 23, 1775 Contents List of Illustrations xv Preface xvii Acknowledgments xix Introduction xxi Chapter 1. In the Beginning 1. The Antecedents: World Trade Before the Discovery of America 3 Mercantilism 3 • Law and Finance 4 • The Birth of Money 4 • Bills of Exchange 5 • Ancient Derivatives 5 • Insurance 6 • Lending and Trade 6 • Finance in Spain at the Time of Columbus 7 • Finance in England Before the Discovery of America 8 • Ancient Rome and Renaissance Italy 12 • Finance Elsewhere in Europe Before Columbus 15 2. The Colonization of America 19 Finance in America Upon the Arrival of Columbus 19 • Europeans Arrive in the New World 20 • The English in North America 21 • Establishment of Permanent Colonies in America 24 3. Commerce With the Colonies 30 Regulation of Trade 30 • The Colonies Do Not Submit Meekly 31 • The Royal Colonies and the Board of Trade 33 • Economic Expansion 35 • Slavery and Finance 37• Methods of Exchange 38 • The Export Trade 39 • America’s Benefit to England 40 4. Trade and Money 43 Money in America 43 • Commodity Money 44 • Coins as Currency 46 • Paper Money 48 • Bills of Credit 50 • Fluctuations in Currency Values 53 • Monetary Problems 55 ix x CONTENTS 5. Revolutionary Finance 58 Revolution 58 • Financing Independence 60 • Dealing With Inflation 66 • Robert Morris 69 • The Morris Bank 71 Chapter 2. A Nation Is Born 1. Independence 75 The Articles of Confederation 75 • The Constitution 76 • The Fight Over Assumption 77 • Assumption Succeeds 79 • Assumption Leads to an Insider Trading Scandal 80 • Taxation With Representation 81 • Monetary Problems Continue 82 • Creation of a Mint 83 • Early Banking Development 84 • Banking Growth 86 • The Bank of North America 87 • Creation of a National Bank 88 • The Treasury Department and State Banks 90 • Money Shortages and Problems 91 2. The Development of Corporations 93 Stock Exchanges Are Formed 93 • Trading in London 94 • Stock Jobbers 96 • The South Sea Bubble 97 • The Bubble Bursts 98 • The Mississippi Bubble 100 • Speculation in America 101 • Land Companies 102 • Other Business Associations 104 • Commercial Corporations 105 • Corporate Growth 106 3. The Rise of the American Stock Market 108 William Duer 109 • The Duer Panic 110 • The Morris Failure 111 • Alexander Hamilton’s Travails 113 • The Market Grows 114 • Speculation in Securities 115 • Trading in New York 116 • Securities Auctions 117 • Government Reaction to Speculation 118 • Speculation Continues Despite Concerns 119 • The Lotteries 119 • Securities Trading Expands 120 • The War of 1812 121 • Post-War Problems 123 • The NYSE Is Formed 123 • Insider Trading 124 4. The Bank of the United States 126 State Banks Jump Into the Void 127 • Banking Operations 128 • Currency Exchange 130 • Clearinghouses 131 • Banking Problems Grow 131 • Savings Banks and Other Intermediaries 131 • Currency Problems 132 • Bank Regulation 133 • A New National Bank 134 • The Second Bank 135 • State Taxes 136 • The Bank Affects the National Economy 137 • Currency Problems Remain 138 Chapter 3. Finance Before the Civil War 1. The Bank Fight 141 Nicholas Biddle 141 • Andrew Jackson 142 • Henry Clay Joins the Battle 143 • The Second Bank Loses the Fight 144 • The Pet Banks 144 • The Second Bank Reacts With Venom 145 • Jackson’s Questionable CONTENTS xi Victory 146 • Specie and Monetary Problems 147 • The Specie Circular 148 • The Panic of 1837 149 • Government Deposits 150 • Specie Suspensions 151 • The Independent Treasury System 151 • Currency Solutions Remain Elusive 152 • Shinplasters 153 2. Stock Exchanges and Railroads 154 Internal Improvements 154 • Corporate Development 155 • The NYSE 156 • Transfer Systems 157 • Brokerage Firms 158 • Trading Markets Expand 159 • NYSE Changes 159 • Margin Trading 160 • Jacob Little 161 • Short Sales and Manipulation 162 • Market Information 162 • Foreign Capital 163 • State Bonds 164 • Railroad Stocks 165 • London Investors 166 • Market Reversals 166 3. The State Banks 168 Banking Problems Grow 168 • The Suffolk System 169 • State Regulation 170 • Bank Regulation in New York 171 • Safety Funds 171 • State Involvement in Banking 172 • Private and State Banks 173 • Southern Banking 174 • Commercial Paper 175 • Banknotes 175 • Bank Branching 176 • Clearing and Settlement 177 • Checks 178 • Thrift Expansion 178 • More Money Problems 179 4. Insurance in America 181 Lloyd’s of London 181 • Life Insurance 182 • Marine Insurance 182 • Fire Insurance 182 • Insurable Interest Requirement 183 • Annuities 184 • Other Forms of Insurance 184 • Marine Insurance in America 185 • Fire Insurance in America 185 • Mutual Insurance 186 • Annuities in America 187 • Life Insurance in America 188 • Tontine Schemes 188 • Term Insurance 189 • Insurance Company Growth 190 • MLIC and Other Companies 191 • The Great Fires 192 • Insurance Regulation 193 • Insurance Agents 193 5. The Panic of 1857 195 The Exchange Business 196 • Alexander Brown & Sons 196 • Express Services and Finance 197 • Financial Transactions Evolve 198 • Investment Standards Are Set for Trustees 198 • Gold Discoveries 199 • Finance in the West 200 • Trading Problems 200 • The Panic Begins 201 • Causes of the Panic 202 • Investment Banking 203 • Sectional Issues 203 Chapter 4. The Civil War and Speculation 1. Union Finance 207 Northern Financial Problems 208 • Wartime Measures 208 • Salmon P. Chase 209 • Jay Cooke 211 • Criticism of Cooke 212 • Financial Problems Mount 213 • Need for a National Currency 214 • Legal Tender Problems 215 • National Banks 217 • National Bank Regulation 218 • Branching and State Banks 219 • Wartime Costs 220 • Finances and Assassination 221 xii CONTENTS 2. Confederate Finance 223 Confederate Taxes 223 • Money Troubles 226 • Borrowing to Finance the War 226 • Commodity Currency 228 • Confederate Notes 229 • Counterfeiting 230 • Currency Shortages 231 • King Cotton 231 • The Erlanger Loan 232 • Inflation 234 • Private Finance 236 • Confederate Finance Collapses 237 • Confederate Note Holders 240 3. Wartime Speculation 241 War and the NYSE 241 • Exchange Competition 242 • Gold and Oil Sales 243 • Country Trading 244 • Stock Market Communications 245 • Railroad Finances 246 • Stock Manipulations 247 • Foreign Investment During the War 249 • Peace Causes a Market Downturn 249 4. The Robber Barons 251 John Jacob Astor 251 • Stephen Girard 252 • Cornelius Vanderbilt 253 • Daniel Drew 254 • Skulduggery 255 • The Erie Gang 257 • The Erie Gang Splits Up 260 • Jay Gould 262 • The Robber Baron Creed 264 5. Commodity Markets and the Gold Corner 265 Derivatives in America 265 • Commodity Exchanges 266 • The CBOT 267 • Commodity Exchanges Proliferate 268 • The Gold Market 269 • The Ketchum Forgeries 271 • The Epic Gold Corner 272 • The Corner Is Broken 274 Chapter 5. The Panics 1. Financial Growth and the Panic of 1873 279 Growth of the Equitable 280 • Insurance Regulation 281 • Expansion of Coverage 282 • Consumer Credit 282 • Bank Failures 282 • Margin Transactions in Stock 283 • Certified Checks 284 • Lockups 284 • New Financial Figures 285 • European Investment 286 • Women Investors 287 • The NYSE 288 • The Crédit Mobilier 290 • Underwriting Develops 291 • The Panic of 1873 293 • Money Market Concerns 295 2. The Panic of 1884 297 Speculation and Syndicates 297 • Reconstruction Finance 299 • Credit Agencies 299 • Stock Tickers and Transfers 300 • The Telephone Arrives 301 • The Panic of 1884 301 • Bank Runs 303 • Speculators Suffer 303 • Call Money 304 • Trading Activities 304 • Brown Brothers 305 • Traveler’s Checks 306 • The Rothschild Investment Banking Firm 306 • Baring Brothers 307 • Fixed Income Instruments 308 3. Commodity Markets and Bucket Shops 310 Chicago Traders 310 • The Leiter Corner 311 • Short Sellers 312 • More Chicago Exchanges Are Formed 313 • National Board of Trade 313 • Commodity Clearinghouses 314 • Oil Futures 314 • Futures Trading on Margin 315 • Futures Marketing 316 • CONTENTS xiii Privileges 316 • Difference Trading 317 • Bucket Shops 318 • Gambling Transactions 319 • Speculation Has Advantages 320 • Congress Considers Legislation 320 • Regulation of Speculation in Germany Fails 320 4. Investment Trusts and the Panic of 1893 322 The French
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