Nvidia’s Risky Business

Listen to Podcast On January 1, 1870, Jay Cooke, hailed as an American hero for his role in financing the Union effort in the Civil War, signed a contract that would, if you squint, lead to world war. In 1864, Congress had created the Northern Pacific Railway Company with the goal of linking the Great Lakes and Puget Sound with tracks that would eventually run from Duluth to Tacoma; the charter included 40 million acres of land adjacent to the proposed line in exchange for accomplishing the build-out. For the ensuing six years, however, Northern Pacific struggled to secure financing, even as the Union Pacific and Central Pacific railroads built towards each other, driving the golden spike linking Sacramento and Omaha in May 1869. Northern Pacific had approached Cooke about funding in 1866, but lacked the generous federal guarantees that undergirded Union Pacific and Central Pacific (which, it should be noted, led to an incredible amount of graft); Cooke, himself no stranger to the financial power of the federal government, wasn’t interested. Ultimately, however, Northern Pacific gave him an offer he couldn’t resist: a commission of 12 percent on every bond, and $200 of Northern Pacific stock for every $1,000 in bonds he sold. Cooke soon found that his institutional peers agreed with his earlier refusal, and weren’t interested in his bonds, so he leaned on the same tactics he honed selling war bonds: appeals to patriotism, control of the media, and promises of railroad fortunes, backed by industrial-scale distribution. At the peak Cooke employed 1,500 salespeople and funded 1,300 newspapers (through a combination of advertising and direct payments) with a brand burnished . Retail investors could already buy railway bonds; Cooke made them his primary funding mechanism. This was, to be certain, an incredible innovation. It used to be the case that if you couldn’t get loans from the government or from banks, you couldn’t get much money at all. The problem was that Northern Pacific’s capital needs were endless, and by September 1873, as credit tightened worldwide thanks to a crash on the Vienna stock exchange and the demonetization of silver, Cooke, who had been funding Northern Pacific from deposits in between bond issuances, could find no more buyers. The subsequent bankruptcy of Jay Cooke & Company triggered the Panic of 1873, culminating in endless railroad bankruptcies across the country, a multi-year depression, multi-decade deflation, and, one could argue, the financial conditions that made Europe, four decades later, into a tinder box.