Jay Cooke was possibly the most important banker during the Civil War and post-war period. His clever advertising helped increase the sale of war bonds which, in turn, helped to fund the Union. After the war he founded the famous banking house "Jay Cooke and Company." Then, abruptly, on September 18, 1873, he closed the doors of his bank forever. A panic ensued and thirty seven other banking houses and brokerages shut their doors that same day. The Stock Exchange followed, and by the end of the year over five thousand business had failed.
What Cooke did is not too far removed from the shady banking exploits we hear of today. Beginning in 1869, he invested heavily in the Northern Pacific Railway. The railway was considered a high risk venture. Not only were new trains being constructed across the west at unexpectedly high costs, but the model itself was flawed: linking together small towns in the wilderness is not particularly profitable. Railroad Baron Cornelius Vanderbilt, who understood the industry well, pinpointed the problem with the investment strategy:
"Building railroads from nowhere to nowhere is not a legitimate business."
Not unexpectedly, Cooke's get-rich-quick endeavour failed, leading to the ruin of thousands of others in the process. After the collapse of his banking house, the Northern Pacific Railway slipped into bankruptcy in 1875. When the depression he sparked finally ended in 1879, Cooke was able to recover enough to pay his debts, but he never rose to prominence again.
Ironically the Northern Pacific Railway persevered through many difficult economic times, and on March 2, 1970 it was consolidated with other railways into the Burlington Northern Railroad. This nearly 100 years after it played a pivotal role in the financial collapse of the United States.
-Professor Walter
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