We now commence our story of Jay Cooke; generally acknowledged as the first major investment banker, creator of the first "wire house," and the Financier of the Civil War.

Cooke was born in 1821 in what was to become Sandusky, Ohio. He was the son of transplanted upstate New Yorkers who left for the Illinois Territory after the War of 1812. Jay's father would serve both in the Ohio legislature as well as a term in the U.S. House of Representatives.

Cooke eventually made his way to Philadelphia where he went to work for his brother-in-law in a shipping firm. Then in 1839, he took a job as an apprentice with E.W. Clark and Company, where he began to learn how to market securities to customers. It was his first taste of Wall Street.

Clark and Co. was unique in that it employed the local press (through newspaper advertising) to tout whatever stock and bond issues it wished to sell. And, aside from Pennsylvania related offerings', it also became a big player in the sale of railroad securities, an area that was beginning to explode.

The firm's first major success came about as a result of the Mexican War (1846-48). Clark sold Texas bonds to the public just before the start of the conflict. A strong marketing angle was provided in that it was expected that Texas would be annexed if the U.S. emerged victorious. [Officially, Texas was annexed prior to the war, in 1845, but victory would formalize the arrangement.] Investors thus flocked to buy the bonds,
assuming the securities would increase in price when the Mexicans were defeated.

[Through the Treaty of Guadelupe-Hidalgo, Mexico ceded the present states of Arizona, California, New Mexico, Nevada, Texas, Utah, and parts of Colorado and Wyoming. In return, the U.S. paid Mexico $15 million in compensation.]

As a result of this experience, Jay Cooke learned that his greatest profits could be made in times of war.

But E.W. Clark did not survive the panic of 1857. The market was collapsing and Clark was unable to unload its own portfolio holdings without incurring tremendous losses. Jay Cooke was out of a job.

Lest you feel too sorry for Mr. Cooke, you should know that he had amassed a nice nest egg as a result of his tenure at Clark and Co. Coupled with his conservative nature, he didn't need to rush into his next venture.

He did get involved, however, with the burgeoning railroad industry and offered to raise capital for several of them through bond underwritings. He also reorganized several bankrupt railroads and canals. Cooke hadn't even bothered to establish a banking house. But he was performing all the roles of an investment banker.

Finally, on January 1, 1861, Jay Cooke and Company was founded in Philadelphia. While the firm was small, Cooke was worth a relatively puny $150,000 when he commenced operations, what he lacked in capital he made up for in his experience with marketing large issues of securities.

Cooke was dwarfed in size by the big Philly banks, particularly Drexel and Girard. But Cooke masterfully used his political connections, the biggest being former Ohio Senator Salmon Chase. Chase had sought the Republican presidential nomination in 1860 and Cooke had contributed to his campaign. And there was another valuable connection between the two; Jay's brother, Henry.

Henry was the former editor of the Ohio State Journal of Columbus, a newspaper in which Chase had a financial interest. When President Lincoln took office, Chase was appointed to be his secretary of the Treasury. Chase, in turn, brought Henry over
to be an assistant in the department. And it was from this position that Henry was able to dispense all kinds of hot information about impending Treasury actions to his brother Jay.

Salmon Chase's race for the presidency had been an expensive one, in part because of his young daughter Kate. It seems that Kate was quite the hostess, holding elaborate parties in Washington. Jay Cooke wormed his way in by extending loans to Chase.

Historian Russell Weigley describes the process:
"(Cooke invested) the amount of the loans and paid Chase generally out of the dividends and profits, without either man's bothering to keep a careful accounting of whether the money reaching Chase was merely what was owed him from investment of the loans. In any event, Cooke's investments for Chase had a happy habit of returning proceeds just at those times when Chase's financial needs were greatest."

Fort Sumter fell on April 13, 1861. President Lincoln sought a short war and requested 400,000 troops and $400 million to pay for it. Treasury Secretary Chase intended to raise about $320 million, of which $240 million was to be borrowed through the sale of paper. But Chase also knew that his predecessors, Secretaries Cobb and Dix, who had served under President Buchanan, had failed to sell as much as $10 million of any single offering. Salmon Chase was a lawyer, not an investment banker. It was time for Jay Cooke, banker and marketing guru, to come to the aid of his country.

Next week, the financing of the Civil War.

Sources:

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"

Brian Trumbore