Hitting the Buffers: The 1873 railway bust that broke one of America’s greatest financiers

0:00Jay Cook and co had three main branches. In New York, he had his own partners that were very able, but they literally just ran out of money. They didn't have enough money to meet their own obligations. So the New York partners summon all the big counterparties among the big brokerage houses and investment banks on Wall Street and say, look, if we don't have a million dollars by 10 a.m., we're dead.

0:20Gillian Tett: Wow. Yeah. That's where you get the spooky music and dramatic music into the movie. It is the moment, really. It electrified everybody. This was not a small bank. This was like a JP Morgan or a Goldman Sachs out of the blue suddenly saying, we're dead.

0:44Today on the story of money, what happens when an exciting new technology fuels an investment bubble, attracting a huge amount of money that eventually stages a spectacular burst.

0:57Gillian Tett: Now, we could be talking about the present day AI boom, but in fact, we're going to bring you a story that took place 150 years ago. It's about the technology that first knitted the US economy together, financed by an unprecedented accumulation of debt. Vast fortunes were made as the market built up a head of steam before hitting the buffers in one of the biggest financial panics in Wall Street history. one that derailed the US economy for years afterwards. So if you still haven't figured out which technology we're talking about, well, Robin, do you want to do the honours? It's the railways, of course.

1:37Gillian Tett: Of course it is. And you care a lot about railways, don't you? Well, the huge railway bond boom of the late 19th century is just a fascinating episode. It's perhaps the most spectacular debt-fueled capital expenditure splurge in history. Tens of thousands of miles of track was laid across the US from east to west, north to south, and really kind of set the path to the US becoming the world's mightiest economy. And in many ways, the railway boom was also proof that you can have an amazing revolution technology that seems good, but it doesn't mean that it's going to be a straight path forward for finance.

2:14Gillian Tett: On the contrary, you can have some very damaging booms and busts. And that's got a lot of lessons for today's AI mania, which we'll be looking at in today's episode. But Robin, you're the one who's going to be talking about this most of all because you've written a book on it, haven't you? Well, it's a chapter in a book. I'm writing a book on the history of the bond market. And there's a chapter on the railway bond boom of the 19th century because it's spectacular. It really is just a glorious, demented period of finance and economic history, really. It was when railways really knitted physically the United States together.

2:49Gillian Tett: A bit like the internet today in cyberspace, but the railways did it in physical ways. So Alexander Hamilton first issued treasury bonds to knit those first colonies together into one federal state. Railways physically brought the United States. It made the United States in, I'd argue, a very real sense. It also helped spark the first great big corporate bond market. It was a massive moment in the history of finance, and that's what we're going to be diving into today. So for all those reasons, you need to listen on. This is me, Gillian Ted. And me, Robin Wigglesworth, on the story of money.

4:06Gillian Tett: So, Robin, we know how this story is going to end. It's a crazy boom that turns into a bust. It involves the railways. It involves manias. It's got parallels with Lehman Brothers. It's really dramatic. But before we start that, and before we start talking about the parallels with, say, the dot-com bubble or 2007 or even the AI world today, explain to us how and why this crazy bubble formed and give us a sense of what happened on the moment it actually went bust. So it was actually called the Panic of 1873 for a long time. It happened on 18th September, and it was the culmination of a just, frankly, epic eight-year-long construction boom in railways that came after the US Civil War.

4:55And it was all financed by bonds, really. And it was an epic crash on the stock market, actually. The New York Stock Exchange had to close for 10 days. It was the longest closure ever in the New York Stock Exchange up until the outbreak of World War I. The exchange lost a quarter of its value, actually. It was, if not quite Black Monday, it was pretty close to it. It was a big one. So I actually have a report here from the New York Times from that day that actually really captures it. And it's vivid, so I'm going to read it out to you. The brokers stood perfectly thunderstruck for a moment. Prices were declining frightfully.

5:30Some of the men who were ruined swore. Some of them wept. Some went out to the street without saying a word. Others talked of the trouble in a jovial way and went about trying to borrow money from friends. That's from the New York Times the day after the panic of 1873.

5:47Gillian Tett: I guess it's fascinating because you talk about the bond markets. It wasn't just the stock markets. Yeah. So the bond markets is kind of really the epicenter of this crisis. But in the crash itself, the real focus were the banks themselves. In the 19th century, we often call financial crisis panics because there were literally panics. People were worried about the safety of banks. There was no Federal Reserve in the United States. There was no deposit insurance. If the banks were unsafe, well, you went there and yanked your money out in a panic. And that, of course, would cause the bank to collapse.

6:19And it would typically cause a domino of banks to collapse.

6:22Gillian Tett: So quite literally, people were running the bank or queuing up. Exactly. And the bank at the centre in 1873 was something called J. Cook and Company. That was the bank that collapsed that day and caused that frightful reaction that the New York Times detailed. So a bit like the Lehman Brothers of, you know, the 19th century. And at the heart of this whole dramatic story, there was J. Cook and Company, which isn't that well known today. Yeah. So J. Cook was the man. I mean, even calling him the John Pierpont Morgan of his day, actually underplays how titanic he was. He was the world's most powerful financier.

6:57He was even more powerful than the Rothschilds, arguably. His bank was synonymous with American finance, almost synonymous with American economic might at the time.

7:05Gillian Tett: So tell me, I mean, I've never heard of Jay Cook. I clearly should have done. Where did he come from and how did he get so rich? Well, so he was born in rural Ohio when Ohio really was the frontier state. He came from a relatively affluent but unremarkable family. His father had a really weird name, Elephtheiros or something. He was named after a really obscure Greek saint and he hated his name so much he gave all his sons very simple names like Jay, John. So Jay Cook became kind of a financier almost by accident. He ended up being a princess to a local bank and he did really well. He made partner when he was still in his 20s and took over the bank in his 30s.

7:50Bonds were his métier. He's a brilliant bond salesman, bronze structurer. And actually, he was so good that he retired in his mid-30s because he'd basically achieved everything he wanted to achieve. He was wealthy.

8:03Gillian Tett: So was he a bit of a slimy, weasley kind of entrepreneur or was he more like a classic 19th century big sort of robber baron figure? I mean, what kind of person was he? Neither really. He's a man of immense contradictions. He looked a bit like Santa Claus, if Santa Claus looked really mean. He had big, glowering eyes, a big, white, bushy beard. He was incredibly intense. He was not like a chit-chatty guy. He's not a slick salesman, but he was clearly incredibly brilliant. He really admired Native Americans. He named his estate later on after a chief from the Wiyandot tribe that he really had met several times when he was a child, used to ride on his shoulders and just admired hugely.

8:46But the railways he financed and ran later on, frankly, just ripped apart huge parts of Native American lands. He was an ardent abolitionist, but he wouldn't let people of color ride on his tram lines. He hated graft and bribery. He said he did, at least, but he was pretty good at it. He didn't like corruption, but he was very good at cultivating people in power. And he was also fabulously wealthy, but he lived a pretty simple Puritan life, apart from this massive estate that he built called Ogontz after that chief.

9:22Gillian Tett: So he came from Ohio. Did he carry on living in Ohio? No, but then he'd moved to Philadelphia, which was arguably maybe the financial center rival to New York at the time. So he does sound like a really fascinating character. And as you say, somebody who actually epitomized a lot of the contradictions, not just in finance, but actually in the American country and nation as a whole back then, when you had both this very high-minded sense of biblical pioneer purpose, coupled with this wild entrepreneurialism and get-rich-quick mentality in many ways. No, I think so. He's kind of, in many ways, a quintessential American financier.

10:02Sadly, we have forgotten a bit today, but he was just a fascinating character. I'm not saying he was an amazing human being because he had amazing sides, but he also had darker sides, clearly. And I think that makes him even more compelling, at least to me.

10:14Gillian Tett: Right. It's pretty that de Tocqueville didn't meet him to write about him. Yes, exactly. It's a century too late, I think. So we have this man who's a complete contradiction, who's a rags to riches story, and then we'll meet back to rags again, but also in many ways epitomizes the contradictions in America. But I'm curious, he starts off on rural Ohio. How on earth did he get involved in the railway boom and high finance? Well, he moved to Philadelphia in 1839. Philadelphia was at the time a major financial center as well. His first big moment was arguably selling bonds on behalf of the US government to finance its war against Mexico in the 1840s.

10:53Gillian Tett: It always helps to get close to the American government. It does, doesn't it? I'd say this reflected more his skill as a bond salesman. He had sold lots of bonds on behalf of railways already, canals, factories, businesses in the US. Bonds were a big thing already in the United States. Was he just a natural salesman or did he actually come up with some clever innovations as well? The main thing we saw that was in the Civil War when really he rose from being sort of probably one of the preeminent bankers in America to being a titan. He came kind of out of retirement to help the North raise money to finance the war against the South, because initially the war was not going well for the North.

11:37It was, especially with Philadelphia, was struggling to sell bonds to finance its contribution in the fight. And he basically stepped in and just did an incredible job, essentially.

11:47Gillian Tett: So it sounds like, you know, as ever, wars don't only spark a lot of innovation, they also enable some people to make fortunes. And he was clearly one of those. So why was he so good at selling bonds? Well, the main innovation, again, that we really saw in the Civil War was mass selling. You know, bonds were typically sold to banks, to big insurance companies at the time, very wealthy individuals, maybe a few sort of relatively well-to-do shopkeepers and people like that. But he realized that the North had to mobilize entire citizenship. This was kind of what Clausewitz would call total war beyond the financial sphere.

12:26So he sold bonds in extremely low denominations. It was$50, but you could also slice it up into different ways so that anybody could and should join in to fight. Even if they couldn't send their sons and daughters and so on to fight, they could help the war effort by buying the North's bonds. He marketed, he sold, he handed out leaflets. He did these little explanations and Q &As. He put in all the newspapers in the world. It was incredibly aggressive. It's kind of the first big bond push that we actually saw the U.S. replicate, almost like verbatim, in World War I with the Liberty Loan Program.

13:05And that's how he managed to do it. And it was a big deal. Even Ulysses Grant said that once they finally had Northwood One, that sends somebody to Cook and say, tell him that it is to his labours more than those of any other man that the people of this country owe the continued life of the nation.

13:26Gillian Tett: So, Ulysses' grander course was a general of the Union army. And to get that kind of praise is very striking. How did Jay Cook react to that? Well, it probably won't shock you that he was not a fantastically humble man. He did not downplay this. I've got another great quote from him. In his own words, like Moses and Washington and Lincoln and Grant, I have been, I firmly believe, God's chosen instrument, especially in the financial work of saving the union. Well, the hard fact is that many financial geniuses and big titans of Wall Street, the city of London, also have a bit of a Messiah God-like complex as well.

14:02Gillian Tett: Touché. Exactly. So we have this extraordinary figure who has done amazingly well, not just originally in the bank, but then got on to supposedly single-handedly save the Civil War for the North by selling bonds in this mass market way. Why on earth doesn't he just at that point go off and spend his time fishing and having a nice quiet life? Why does he get involved in railways? I guess a bit like it's like Al Pacino in the third Godfather film where it's like, I tried to leave, but they pulled me back in. But really, I think it's his ambition that pulled them back in. And this is 1865, isn't it?

14:37Gillian Tett: When the Civil War is now over. And basically, they're about to start the task of trying to rebuild the country. Yeah. So there'd been lots of talk of transcontinental railways before the Civil War. But this became kind of the, for political and cultural reasons, the great unifying project of America after the Civil War. So there were lots of unemployed soldiers. The country's economy Maybe it was a shambles. And they thought that transcontinental railways could be this, you know, in very real, practical way, a valuable thing, but also symbolically powerful in tying the country together. The pre-war network of railways was around 25 ,000 miles of track.

15:18That was basically all in the states east of the Mississippi. That was a lot of railways. I mean, there's much as much as we had in Europe, but it wasn't nearly what it was about to become. The government decided it was going to finance with bond guarantees and land grants the construction of the first transcontinental railway by two companies, the Central Pacific and Union Pacific. And they were building from each coast and they were going to meet together somewhere in the middle.

15:48Gillian Tett: Wow. Well, this sounds like an extraordinarily ambitious vision, not just technologically, but also in terms of nation building and, of course, financially as well. I mean, who were the people actually building this? Was this a period of Irish immigrants or were there others involved as well? Yes. So there were lots of unemployed soldiers, but a lot of Irish laborers and Chinese laborers. Chinese as well? Yes, a lot of Chinese laborers. It was one of the first big booms there. Someone should tell Donald Trump that Chinese helped to build America. No, exactly. They helped literally build the physical skeleton of the American economy.

16:20They were huge contributors. And this is not glamorous or easy work. This was incredibly hard in flat stretches of land close to civilization. But in the middle of nowhere, in mountains and gorges and prairies and deserts, it's lethal work. I mean, thousands of people died building these railways.

16:42Gillian Tett: And so just like in the way the internet completely transformed our imagination of how we all communicate with each other and interact with each other and made businesses possible where there were no businesses before, I'd imagine the railway must have done the same thing as well in the middle of America in terms of towns or industrial complexes and things. Well, in Europe, railways typically connected towns together, towns and villages and cities in different countries. In the US, railways literally created towns and cities. There were towns and cities that built up around where they built the railways.

17:16They were kind of even more sort of risky venture capital type investments, a bit like today with AI, than they were in Europe. These were, you know, hugely expensive, incredibly dangerous and highly financially risky projects.

17:33Gillian Tett: And one of the things, of course, that the Internet did was to really crush the cost of communication. Did the same thing happen with putting the railways in, in terms of the physical movement of people across the country or goods? Yeah, before there was almost no way or no easy way of going from East Coast to West Coast. This was a country that ran, you know, north to south, south to north on the East Coast. The trains just revolutionized that completely changed the axis of the entire country and then massively, radically lowered the cost of transportation. So you could, in theory, after the transcontinental railways were built, you could eat main lobster in Los Angeles and you could have Californian oranges in New York.

18:12because it was so much easy and cheap and quicker to transport these goods.

18:16Gillian Tett: So in many ways, it was a kind of win-win-win in the sense you were essentially stitching the country together to create a sense of nationhood and presumably driving lots of growth as well. What's not to like? Yeah, the railways turned the US into a proper industrial country, a country that had arguably been agrarian or agricultural beforehand became an industrial powerhouse thanks to railways. And of course, made some people very rich too. Yes. I think what is sometimes forgotten about the railway boom is that the financial tracks it ran on was not the stock market, even though that gets a lot of attention.

18:52It's actually bonds. The amount of bonds issued by towns and railway companies to build these things was just unimaginable. So I've got some numbers here that really sort of hammers home the scale. By 1867, the US railways had issued$416 million worth of bonds, which was quite a bit for the era, but not massive. But by 1874, it had reached$2.2 billion. And that was a massive amount at the time. By 1890, that was$5 billion worth of bonds.

19:24Gillian Tett: And what is that in today's money? Well, so if you just adjust for inflation, it's around$180 billion, which is a lot, but again, doesn't sound that much. But you have to realize that the US economy was so much smaller back then. So GDP in the US in 1890, let's take that year, was around$15 billion. So$5 billion worth of bonds equates to basically a third of GDP. So if we translate to today, we're talking a$10 trillion capex boom in one industry. So you're saying in relative terms, the railway boom involved more finance than even the AI boom today? Yeah, it is. The AI data center splurge, the building of it, is now, it seems, by most data points we've looked at, the biggest since the railways.

20:14But it's around 1.2 % of GDP. The railway boom, we're talking about 10, 15 % of GDP.

20:20Gillian Tett: So AI maniacs eat your heart out. Yeah. And how does this compare to, say, government spending? Because normally we think the governments do most spending, don't we? Well, this was a private market as well. That's what's so interesting. Yes, bonds primarily had been a government financing tool. The US had borrowed a lot to finance the civil war. Obviously, that's fairly expensive. But even that was dwarfed. So it was around$2 billion worth that the US government borrowed, the northern government borrowed, to pay for its efforts to keep the country together. So the railway boom was more than twice that.

20:52Gillian Tett: It's just head spinning. I mean, and it raises the question, though, if you're going to issue these bonds and need all this finance, who the heck is going to finance it? Where did all the money come for this massive issuance? Who were the buyers? So it's important to remember that this came after the Civil War. And actually, those techniques that Jay Cook had pioneered during the Civil War to finance that$2 billion bond splurge was replicated by him, but also everybody else subsequently. This was basically an entire population that had been primed to buy bonds. They'd been educated about bonds for years and years and bought lots of bonds and frankly, probably made a decent amount of money by lending money to the US government.

21:34And that obviously whets the appetite. If you made a bit of money, you want to make more money. And then afterwards, you have these incredibly compelling visions of this hot new technology. So it's actually pretty easy to sell to people. There's a great quote from the historian Richard White, who's written one of the best books on this episode, which kind of shows how the progressive railway boom kind of grew out of the Civil War bond boom. Here it is. investors proceeded from government bonds to government secured railway bonds, to convertible bonds, to mortgage bonds vouched for by the same people who sold the government bonds, to a whole array of financial instruments, and from there, potentially into the drink.

22:18Yeah. There were first mortgage bonds and second mortgage bonds. There were mortgage bonds on the trunk line and mortgages on the branches. There were land grant bonds and income bonds. There everything that investors might accept as collateral. The bankers, as well as the railroads they represented, trumpeted the security of these investments. They were, in effect, so many carnival barkers.

22:42Gillian Tett: Wow. Yeah. And for a long time, it works. It always does. Everyone makes money. It seems to work. Exactly. So you've got this wild mania around every type of bond that moves. And in fact, you've got these wonderful phrases like carnival barkers, which I love. Was Jay Cook a carnival barker? Where did he fit into all this? No, I mean, like I said, he was quite an austere guy. He was very clear about differentiating speculation from investment. And he had invested and helped back railway bonds before the Civil War and a few afterwards, but solid, serious ones backed by between towns and and had a clear economic rationale.

23:25He did not initially believe in the mania for transcontinental railways because after one was built, people wanted to build more and more and more. This was the hot new thing. And he actually, to his credit, did stay out of it for a little bit.

23:40Gillian Tett: Right. Well, good for him. How close was he to the government? Because the government must have been involved somewhere in the background in all this, was it? Yes. Cook was reasonably close to the government. He always stressed that he didn't like corruption and graft and nepotism, but his brother especially was extremely influential in the Republican Party. And Jay Cook definitely benefited from that. To his credit, for example, when he sold bonds on behalf of the US government during the Civil War, he charged extremely little. His commission was very small. And when there was an outcry against that, he cut it further.

24:15So he did not sort of become a wealthy man for stiffing the US government. But he definitely benefited from ties both directly with him and his brother to the Republicans. And then later on, Ulysses Grant became President Grant as well. And they were certainly very close.

24:33Gillian Tett: Well, I guess if that had been 2025, 26, there would have been photographs of him at the inauguration in the White House for the new president, wouldn't there? Oh, definitely. Well, President Grant actually came to a house party, several house party at Jay Cook's Ogont's mansion house, including its inauguration. So just to underscore the importance of Cook, Grant came to his housewarming party. I don't know if Cook came to Grant's housewarming party at the White House. Ha! Well, that's kind of funny because it again shows that all the hand-wringing about the links between the AI and big tech sector in the Washington today is part of a long-established historical tradition.

25:15Gillian Tett: True. But I'm curious because, you know, Ulysses Grant, insofar as I remember my history books, wasn't quite the same as Washington and Eisenhower, was he? I mean, he's often seen as being one of the more corrupt presidents that America's had. To be fair to Grant, it's unclear whether he was personally corrupt. But despite being a great wartime general, he seemed to have been an incredibly, incredibly bad judge of character. There's literally a Wikipedia page just with all the scandals in his administration, which I don't think is a good thing. And of all the scandals that developed at the Grant presidency, the biggest by far was a Credit Mobilier scandal.

25:57That involved Union Pacific Railway executives creating an entirely sham construction company called Credit Mobilier of America, and they used it to siphon off federal subsidies and profits. And this scheme predated Grant's presidency, but it involved a lot of Republicans close to him, including his vice president, Skylar Colfax. So it still is today probably one of the biggest scandals in American history.

26:25Gillian Tett: And that's a lot of competition. Yes, very true. So you have the ingredients for this really heady cocktail of a president who is a war hero, but presiding over a corrupt administration. And you have this extraordinary character, Jay Cook, who says he's incredibly biblical and upright, but is also very ambitious and busy creating all kinds of new financial marketing schemes around bonds and wanting to build railways. So let's stop there for a commercial break. And when we return, we'll talk about how this story starts to go horribly wrong around the North Pacific Railway.

27:24Gillian Tett: all while aiming to deliver the resilience and returns that portfolios seek today. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible.

27:45Gillian Tett: Okay, we're back in 1869, and it's a pretty momentous year because the civil war is over, The new railway boom is underway. It's bigger than anything America's seen before. And essentially, they're using this astonishing race to build the railways to knit the country together, create jobs, create an economic boom, and of course, a financial boom too. But as so often in history, what starts off as a good idea is starting to go bad because there's money being funneled into not just good schemes, but bad ones too. So tell us how Jay Cook enters the story at this point, because he was also something of a hero at this point.

28:28Gillian Tett: He had done a remarkable job in financing the Civil War and having a stellar career. And yet something starts to go wrong. Yeah, he was fabulously wealthy, enormously successful. And to his credit, initially stayed out of the whole kind of railway mania, bond mania that started after the Civil War. until 1869. And that's when he makes a horrible, but no good, terrible mistake. But he could have just gone fishing. I mean, he was already super wealthy. He had nothing to prove. Yeah. Why would he get suckered in? Ironically, he loved fishing. That's exactly what he should have done. His only two hobbies were fishing and discussing theology with seminarians and priests.

29:11Gillian Tett: Well, memo to all you financially successful financiers, know when to stop. Get out. Exactly. You can't go wrong with just going fishing, basically. So what actually happened? You have to remember, this is a guy with a titanic ego at this stage. And the big economic story at the time are the railways. And that is his metier. I mean, he made his name first by selling railway bonds. And you can see everybody else get rich around him. Maybe not Jay Cook rich, but they're getting pretty rich. And he thinks, well, I know this better than everybody else. So there was a plan for a second transcontinental railway on the northern plains from Montana, Seattle that had failed to raise financing.

29:51It was super risky. They'd already been the first one. And this was obviously then going to be even riskier. And Cook had twice before said no to getting involved. So like, this is not for him. This is speculation. I don't do speculation, essentially. But he gets sucked in. For some reason, he changes his mind. And I think it's just this sense of wanting to be the big man.

30:14Gillian Tett: But couldn't he gone off and done politics instead? because that's what a lot of big Wall Street figures in the last few decades have done when they've achieved everything in finance. They go off and try and become Treasury Secretary or Central Bank Governor or something like that. Yes. I think one of the big sliding door moments of this story is that he was by far the favourite to become Treasury Secretary under Grant because he was close to Grant, he was close to the Republicans, and he is America's preeminent financier. So it made perfect sense. He could have been like Hank Paulson or something.

30:43Gillian Tett: And so why didn't he? He didn't get the job. Okay, that must have been a big blow to his ego. Probably a huge blow. This is the guy that basically has succeeded and managed to do everything he's ever wanted. So at that point, he says, right, okay, I've got to prove that I am worth even more than they thought. And it was a big mistake to turn me down. Yep. So he throws himself into this Northern Pacific Railway. He'd sold a few railway bonds in that boom before. So he underwrote the Lake Superior and Mississippi Railroad. And that had been like the bonds he sold had been 10 times over subscribers.

31:16And people wanted to buy 10 times more bonds than were on sale. So that kind of really also made him realize, oh, my God, we're leaving money on the table here. And he throws himself into the Northern Pacific. So he strikes this fateful deal with this railway company. And frankly, even calling it a railway company is a little bit fanciful. I mean, it's a shell, right? It's an idea. But he agrees that he's going to sell$100 million worth of its bonds. at a 7.3 % interest a year. He's going to buy them off the company at a 12 % discount. So he can make that spread. If he can sell them at that interest rate, he makes that 12 % spread.

31:52And he was going to advance them and give them an advance, give them some of his own money, invest in the company itself. And in return, he was going to get an equity stake of up to 60 % of the company. So this is him really branching out into becoming an industrialist potentially himself.

32:07Gillian Tett: So he's massively exposed. I mean, it's a bit like putting all of your chips on the table onto black at a casino or something like that, saying, yes, I'm going to put it all into railways and basically hopefully make a fortune as it goes right. But raising money at that rate would have been quite high in those days. I mean, was a company that desperate or was it so risky that you had to pay a lot to get investors to get involved? Yes, essentially. I mean, this was one of the riskier projects out there. So some of the other projects that he had financed or helped finance before had been sort of more stronger cases.

32:417.3 % was high, not egregiously high. It was higher than what you maybe get for established railway lines where they're actually making money, but still pretty low for something that is inherently still basically an idea. And I think he thinks he's not taking a huge risk. He's only promising to lend a few hundred thousand, $500 ,000 of his own money in advance, and he's fabulously wealthy. And he's only promising to sell these bonds or try to sell them. And if he can, he makes a lot of money. And if he doesn't, well, then it's fine. And in return, he gets 6 % of the companies. He probably thinks, and it could still have been a dumb idea, but not an epic disaster that it ended up being.

33:23Gillian Tett: So basically, he sets out and tries to build this railway, which goes through all these places like Dakota and Montana and places like that, which are pretty remote, you would have had a lot of Native Americans in that area as well, wouldn't you? I mean, what do they think about the idea? Well, they didn't like it. Funny that. Yes, I know. I mean, this is one of the great tragedies, because this was a man that in many ways for his era had reasonably enlightened views. He was an abolitionist, even though he was clearly not a super enlightened person. He was a great friend or saw himself as a great friend of many of the Native American tribes had always respected them.

34:02But the Northern Pacific Railway goes straight through a lot of crucial Native American lands and just complete North, the Iron Horse, as it was called. And, you know, that inevitably gets violence. It's always expensive and difficult to build these railways. But this becomes basically like a little war.

34:21Gillian Tett: Like a Western movie with lots of, you know, you see those wonderful scenes, the railways going along and basically Native American groups attacking it or cantering along next to it on their horses and things like that. And the terrain, would that have been quite difficult? Because it's pretty remote, pretty boggy, pretty tough to cross. Yeah, lethal and expensive and arduous and difficult. And I think they probably underestimated just how much it would cost and how long it would take. But the big problem was, it seems, these Native American attacks, very understandably so. He uses government connections to get military protection for the construction.

34:58And it didn't help. At times, they were completely chased out of big areas of construction. You can read the annual reports where they talked because American companies started issuing annual reports around then. You can read about how they were essentially just not able to build in certain areas because of attacks from the local tribes.

35:16Gillian Tett: And animals as well, I imagine. You've got all these buffaloes wandering around and stuff. Well, one of the amazing things with American trains is that trains in America evolved differently from European ones. They got these massive, bulbous fronts, heavy fronts, with basically plows. So you could drive at full speed and just smash any bison and pulverize it. Wow. So you're dealing with bisons, bogs, battles. You know, this is not the normal stuff of bomb markets, is it? No, exactly. He's essentially gone all in on what ends up being a massive financial sinkhole, a black hole of money, essentially.

35:55Gillian Tett: But surely, if he actually had a 60 % equity stake, he would have controlled the company. Couldn't he just said, listen, guys, let's try and reroute a bit or try and deal with this in a more intelligent way? One of the bizarre aspects of this is that although he was able to get up to 60 % of the company, he didn't control the board. He didn't have control of the company. We don't know. A blind spot. I guess he just thought, well, I don't want to stay involved in the nitty gritty. I'm the finance guy. I want to own this. I want all the upside and more of the upside, but I don't really want to deal with this.

36:25And unfortunately, it proved that a lot of the Northern Pacific executives and the board were pretty incompetent. They weren't very good at building a transcontinental railway line. And he then found out to his horror that he really didn't have a chance to change the company where he thought necessary.

36:42Gillian Tett: I mean, was it possible to sell the bonds on the back of all this? He couldn't, in fact, sell most of the bonds. And that had led to two problems. Some of the bonds he had underwritten and put on his bank's balance sheet, where they languished unsold. And an advance he'd promised the company so they could build construction, begin construction, he promised$500 ,000, a big sum of money at the time, but something that he could easily carry. But that advance swelled to$7 million. So he just kind of kept doubling down and doubling down as he was unable to sell the company's bonds. And frankly, just got deeper and deeper in the hole.

37:18Gillian Tett: So at what point did investors wake up and start to panic and refuse to buy the bonds? Arguably, the real sort of moment, and this shows how finance is in the 19th century becoming a more global affair, is actually a financial crisis in Austria, of all places. Oh, wow. So it's back to that old interconnected world. The flap of a butterfly's wing in one corner of the globe can cause a hurricane in another. Yeah, and this was an Austrian butterfly flapping its wings very violently. So Austria was enjoying its own financial boom at the time. There were lots of new companies, and this is very strong parallels with today.

37:53It was called the Grunderzeit, or the Entrepreneurs' Age of Entrepreneurship. So lots of entrepreneurs were starting new companies, taking advantage of new technologies in Austria, and the stocks were going high and the Austrian stock market was flying until it all basically imploded in May 1873. and it became known as the Grunderkrack, the entrepreneurial crash, essentially.

38:20Gillian Tett: Grunderkrack, probably sounds better with a German accent. Yes, no, I'm not even going to try that. My German is very feeble these days. And unfortunately, again, because finance is connected, it's global, a lot of the money that went poof in Austria actually came from Germans and Dutch merchants and investors and European investors in general, even some UK ones. And once they basically saw their money disintegrate in Austria, they started liquidating investments elsewhere. And European investors were huge in the American bond market. But in terms of what happened then, the European investors panic because of what's happening in Austria.

38:57Gillian Tett: They start to pull their money out of the American bond market. And then what happens? His bank, Jay Cook & Co., is still one of America's preeminent banks. And they have other business and other stuff they do. But their balance sheet, they are sitting personally on a lot of Northern Pacific bonds. They have not been able to sell. So they are running perilously low on liquidity, on just cash. And the US is still a pretty agricultural economy. And actually, Wall Street's cycles at the time were still very much basically set by the agricultural cycles, which is why people often withdrew money when there was planting season and harvesting season.

39:36And that's why by September, by that September, I mean, the bank had quietly almost come close to failing in 1872. And that only emerged later. And it was kind of bailed out by the fact that the American government knew that there were these pressures every autumn. So they kind of pumped more monies of what we call today QE, but they'd make sure there was enough of free collateral and money coursing around the system in 72. But in 73, it's just so much more acute because of this issue in Europe.

40:10Gillian Tett: But if Jay Cook was so close to Ulysses Grant, and if this bank and this project was so central to the American financial markets, if not the economy, why didn't the government just step in to bail it out? We don't know. But we do know that Ulysses Grant, the president, visited Jay Cook just days before the bank finally had to close its doors. And does anyone know what they talked about? No. We know that Grant went there, I think it was three days before the big crash. So it was 15th of September, 1873. Grant visited Jay Cook in Ogons and stayed overnight on his way to visit his son at a nearby university.

40:52Nobody knows what they talked about. But we do know that the government did not step in. And in fact, arguably, even if they don't bail out Jay Cook themselves, but they could have made sure that there's enough money sloshing around the system in New York.

41:06Gillian Tett: Well, if this was a movie, that scene of them meeting in that overnight stay would have been an extraordinary cliffhanger moment. Because, of course, then what happens next is it goes bust. Yeah. Tell us what happened and why it turned into the Lehman Brothers of the late 19th century. So Jay Cook and co had three main branches in Washington, New York and Philadelphia. And Jay Cook mostly worked out of Philadelphia, but it was in New York a fair bit. But New York, he had his own partners. They were very able, but they literally just ran out of money. This wasn't necessarily, though I think it proved to be a solvency issue, but it was a liquidity issue.

41:42They didn't have enough money to meet their own obligations. People pulling out money because of these issues we talked about. And they didn't have enough money at hand. So the New York partners summon all the big counterparties among the big brokerage houses and investment banks on Wall Street and say, look, if we don't have a million dollars by 10 a.m., we're dead.

42:00Gillian Tett: Wow. Yeah. That's where you get the spooky music and dramatic music into the movie. It is the moment, really, when, you know, it electrified everybody. This again, this was not a small bank. This was like a JP Morgan or a Goldman Sachs out of the blue, suddenly saying, we're dead. I think people knew that Jay Cook and co might have been in trouble or had problems with bonds and these Northern Pacific bonds, but nobody really understood or appreciated the depth that this bank was teetering on failure and was now basically dead unless everybody else stumped up a collective bailout. And they weren't able to do that.

42:39So they had to literally just shut the doors. That's how they closed banks. They shut the doors. And then New York partners telegrammed Jay Cook in Philadelphia to let him know what they'd done. There's actually a report here from how he reacted, which...

42:55Gillian Tett: I was going to say, did he show his face or... Well, so here it is. He read the dispatch announcing the suspension of Wall Street, sorrowfully ordering the doors of his third street house to be closed also. And then as he turned his face away from the men who surrounded him. The tears streamed from his eyes. It was an unusual sight. No one in his office has seen this great strong man, the pillar of a nation weep, but it was soon over. So that's a quote from Ellis Paxson Oberholzer, who wrote the earliest biography of Jay Cook in 1907 on the closure of the Philadelphia branch. A bit like imagining Jamie Amy Diamond or Larry Fink suddenly bursting to tears in front of everyone on live TV or something like that.

43:40Or Lehman Brothers CEO Dick Fould. I don't think I ever saw him cry, but he doesn't look like the crying type either. But neither was Jay Cook until he finally had to take this step.

43:50Gillian Tett: What happened afterwards? Did Jay Cook lose everything? Did he have to move out of his fancy estates and go and live in penury? Did he go and run away to Mexico? What happened? Well, he had to declare bankruptcy. The bank was bankrupt. So was he personally. He lost Organs, this incredibly opulent estate that he had built and financed himself. It had fake Roman ruins. It had his own personal telegraph station, swimming pools, its own personal 30. It was just, frankly, one of the most opulent estates in America at the time. And he lost it. He had to move in with his daughter. Wow. And did he stay penniless then to rest of his life?

44:29No. Or become a monk or anything like that? No, no, he didn't. He did not die a poor man, though he didn't die maybe as obscenely wealthy as he'd been. By 1880, he'd actually regained a lot of his money. He'd invested in a Utah silver mine alongside Jay Gould, the railway robber baron.

44:45Gillian Tett: Wow. And so he actually staged a rebound? Yeah. So modestly so. So he was able to repurchase Ogons, his estate, but it was so expensive to maintain, he actually donated it and turned it into a school for girls. And is it still standing? I believe it is, yes, though in a very different shape. So that was a story of Jay Cook. And what about the American economy as a whole and the financial system? Did that rebound or stay in the doldrums for a long time? Yes. So it took a long time to recover. It did recover. The US economy always does. But it took six long years. It was a massive crash. It rippled everywhere.

45:25It hit Europe, it hit the UK. But for a long time, it was actually called the Great Depression until we actually had the even greater depression in the 30s. And now economic historians often call it the Long Depression just because of the length and severity of it.

45:40Gillian Tett: And so what happened to all the other railway companies? Did they all topple over as well? Most of them did. As one railway baron once said that, you know, no railway is really economically feasible until it's gone through bankruptcy at least once. and that proved to be true. By the end of 1875, there were over 120 railways with their$550 million worth of bonds had gone bust. Half of all US iron foundries closed by the end of 1874, because with all these railways bust, there was less demand for iron. Corporate bankruptcies doubled from 1873 to a peak of 10 ,000 bankruptcies in 1878. Unemployment soared, deflation set in.

46:23This was a period of hard money. There was still the gold standard, so there was limited what the government could do. There was no central bank that could lower interest rates really. Words like bum became more common after this to describe people that were homeless and living destitute.

46:42Gillian Tett: So you really had a sort of libertarian's dream of a hard money shakeout or a kind of creative destruction period. But did anything come back later on? I mean, was that the end of railway bond booms in America or did it arise again? Nope. You know, within a decade, they were booming again because this was a transformational technology. Again, we underestimate just how powerful it was. There's this great line in a poem by Joaquin River, a frontiersman poet in America. So there's more glory in the rush of a single railway track than there was in the sacking of Troy. Lots of towns still needed railways.

47:22So the boom revved up again. And again, lots of the numbers we had from 1890 shows us how big it was. America was basically then soon on its way to having more railways than almost the rest of the world combined.

47:34Gillian Tett: So it's that eternal American optimism or that Silicon Valley mentality of that failure is not a badge of shame. It's an incentive to try again. Yes. Failure is temporary graft and grit and determination and just pushing ahead. That's forever. Was there another railway bond crash or was that the last one? There have been several since then in the UK and in the US. The periodic financial crisis, but nothing of that severity until 1907. That was a more generalised financial crash. As you and I know, that actually helped spark the birth of the Federal Reserve because it was such a big crash. Well, we're going to come back to that in another episode because that's another amazing story.

48:16Gillian Tett: But this is just a made-for-movies tale about booms, busts, and another boom again. Yes. I do wonder who would play Jay Cook in a movie, though. Daniel Day-Lewis? He'd do a phenomenal role. That's kind of intensity. I think so, yeah. But he needed to grow a big, bushy Santa Claus beard. Oh, he could do that. I'm sure he could. But yes, I think he'd have that kind of glowering presence on screen to kind of capture all the contradictions. Okay, so let's step back for a moment and think about what the lessons are from the financial history you've just described for the present day. One of the interesting questions to think about is, are bubbles bad or not?

48:55Gillian Tett: Because, you know, I read a fantastic book a few years ago by the author Daniel Gross called Pop. which basically argues that when you get a crazy bubble and amount of money pouring into a sector that's completely insane under some measures, what you do is you create an infrastructure that not all the investors funding that infrastructure will benefit from, but society as a whole will be left with something even after the bubble pops that actually is of use and helps to pave the way for more growth and innovation in the future. So we saw that, say, with the fiber optic cables, with the whole telecoms boom and IT boom in the late 1990s.

49:39Gillian Tett: We were left with what essentially became the infrastructure for the internet. Is that what happened with the railway boom? I mean, the fact is that when the bubble burst, the railways were still there, weren't they? I mean, manias and bubbles and crashes, they get a bad name, especially when they cause economic crises. But the reality is, and this is hard to say because obviously economic crises are painful and people lose their jobs. Literally, we know people die more in depressions. But the optimal number of manias is definitely not zero. Manias is kind of, we can see it's kind of hardwired into our psyche.

50:12We can see then across so many countries, across so many times. And very often, I'd say more often than not, they do have positive side effects or direct effects. That after the crash, what we are left with is, yeah, fiber optic cable. We cable the world. Railways that knitted the US together, turned it into the world's most powerful economy. Canals as well, telegraphs. There's so many real estate examples. Florida was a swampy hellhole until somebody decided, oh, we're going to sell it as a nice place for retirees.

50:44Gillian Tett: So, I mean, some of today's modern big tech leaders like Jeff Bezos have said, well, if you look at that parallel for the modern world, the AI boom is also in some ways crazy and hyped up. And at some point, there's probably going to be, you know, a bubble bursting there. But that will also leave behind an AI infrastructure, which will help the world. So he says it's actually a good bubble, quotes, as opposed to something like the 2007 or 2005, six, seven subprime bubble, which wasn't such a good bubble. Would you agree? Well, I'd say, I mean, 07, 08, there was lots of real estate being built.

51:25The US probably, you could argue, has a cheaper housing stock for ordinary people now than it had because of that building boom. I think with AI, it depends on how valuable the overall infrastructure is, because you can get left with this massive series of white evidence. Do we need these vast data centers the size of Manhattan to create like fake videos of cats? Is that really something that's going to usher in the next era? Possibly not. But I am hopeful that actually, yes, clearly there is a bubble. Everybody, even people inside, it's very rare that you hear people inside those industries say very honestly, oh yes, it's definitely a bubble.

52:04But I am very optimistic that we will be left with good stuff after it. I mean, just on the energy infrastructure, they're going to have to build so much more power generation capacity to power these data centers. And that could be a huge boon.

52:18Gillian Tett: Absolutely. I mean, I guess one of the differences that worries me is that the railway lines, the railway track that was laid down in the 1870s and beyond, is still physically sitting there in many cases 150 years later. whereas it's not clear to me that the data centers will be as durable not just because chips tend to have a half-life but also because everyone right now is betting on a certain form of AI essentially large language models and there are other types of AI coming up you know around world models and neurosymbolic AI which haven't got as much attention but might actually end up supplanting some of the other techniques.

52:59Gillian Tett: And so you could end up with a situation a bit like VHS and Betamax, where you have essentially stranded assets. Yeah. No, I mean, not all CapEx booms are created equal, unfortunately. And there is a danger that by pouring all our efforts and money and attention into one area, then something else is starved of attention. And you could argue there's all sorts of things like a renewable energy that arguably could maybe some of the hundreds of billions of dollars now being spent and lent towards AI data centers be more fruitfully diverted elsewhere. That's what we don't really know. And I think in a capitalist economy, in a capitalist system, there are stupid things that happen all the time.

53:39It's just very hard to know how stupid they are and what is stupid before the fact. But I look forward to doing this podcast in 50 years time. We can find out just how durable some of these things ended up being. Well, who knows if they'll still be podcast in 50 years time. Yeah, there's a reason why people say the four most dangerous words in finance is this time is different.

53:59Gillian Tett: Or as I say, those who do not study history are condemned to repeat it and lose money. Yeah. So that's it from us this week. You've been listening to the story of money from the Financial Times with me, Gillian Tett. And me, Robin Wigglesworth. And we'll meet again here next week. See you then.

54:20Thank you.

54:50Gillian Tett: all while aiming to deliver the resilience and returns that portfolios seek today. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible.