Wall St History: 19th Century Growth of Investment Banking
With the demise of the Philadelphia based Bank of the United States, the financial center of the country shifted to the privately owned state chartered financial firms on Wall Street.
As the nation recovered from the severe depression in the Panic of 1837, President James K. Polk’s policy of Manifest Destiny took root and significant westward settlement of Indigenous land expanded in the 1840s. Fortified by the Erie Canal and its Canal Fund, Wall Street financial institutions became strongly influenced by four factors: the invention of the telegraph; the development of railroads; the discovery of gold and other precious minerals in the West (particularly the California Gold Rush of 1849); and the arrival of significant numbers of Jewish and Irish immigrants in the city of New York.
As railroads began to eclipse canals in the 1840s as the most popular mode of transportation, there developed a need for financing enterprises to build them. Unlike the state-constructed Erie Canal, these tended to be private companies assisted by government land grants. As a result the number of companies listed on the New York Stock Exchange grew dramatically, and there also grew significant trading by brokers (frequently non-exchange members) in stocks off the exchange on the streets near the exchange floor (the “curb exchange,” whose stocks the main exchange refused to list).
The ability of brokers on Wall Street to trade this expanded volume of stocks was greatly facilitated by the development of the electrical telegraph, which was established by Samuel B. Morse between Philadelphia and Washington, DC in 1844, and reached New York in 1846 (along with Boston, Buffalo, St. Louis and New Orleans). The telegraph enabled a brokerage firm in New York to telegraph almost instantaneously the prices at which stocks in New York were trading. As a result, firms on Wall Street established satellite offices in other cities, and the auction markets became more efficient and more continuous.
This tended further to concentrate stock trading on Wall Street, although in the 1840s and 1850s a number of rival exchanges were attempted. These exchanges traded only in specific items such as silver, gold and commodities (the Chicago Board of Trade was established in 1848). A number of the stronger of these rival exchanges eventually consolidated into an expanded New York Stock Exchange, whose membership was significantly expanded after the Civil War; others went out of business.
One of the more significant developments affecting Wall Street in this period was the vast expansion of immigration. With the failure of the potato crop in Ireland, Irish immigrants flocked into the United States and particularly to the port cities of New York, Philadelphia, and Boston. In New York they participated in the economic expansion in the decades following the opening of the Erie Canal (DeWitt Clinton had been a supporter of Irish immigration and many Irish labored on the canals).
The numbers of Jewish immigrants fleeing oppression in Central Europe also increased, among them August Belmont, who arrived in New York in 1837 on his way to represent the Rothschilds in Cuba. He came at at the critical time of Panic of 1837 and helped to salvage the Rothschild interests in the city from economic disaster. Thereafter Belmont represented the Rothschilds while establishing himself as one of the city’s leading financiers, becoming a major factor in financing railroads and mining in the 1840s and 1850s.
Belmont sought to assimilate into Protestant New York society, and joined the Episcopal Church in 1849, later marrying the daughter of Commodore Matthew C. Perry, Caroline Slidell Perry Belmont (1829–1892) in a ceremony at Grace Church. He became an active participant in Democratic Party politics by the 1850s, including serving as the Chairman of the Democratic National Committee. Although a supporter of Stephen Douglas over Abraham Lincoln in the Election of 1860, once the South seceded he became staunchly pro-Union during the ensuing Civil War. Belmont helped convince the House of Rothschild not to finance the Confederacy.
More typical of the Jewish arrivals in the 1830s and 1840s who would play a major role on Wall Street were Joseph and Jesse Seligman (and their brothers). The Seligmans did not abandon their Jewish faith or seek to assimilate completely into gentile society in the way that Belmont had. Joseph Seligman, the eldest brother, was born in 1820 in Baiersdorf, Bavaria to a shopkeeper and woolen broker. Over his father’s objection, his mother encouraged him to go to University of Erlangen, but in the twists of European politics it became clear that as a Jew his opportunities would be limited.
With some funding from his mother ($100 allegedly sewed in his jacket) he arrived in New York in 1838 with the ideal training for the new economy. At first settling in Pennsylvania with a relative, he got a job running a store for Asa Packer, a well known businessman and later Congressman, who encouraged him to strike out on his own as an itinerant peddler of goods to rural families in the Ohio Valley and Midwest.
While carrying goods on horseback, and later wagon, was an inauspicious start for a man who twenty-five years later would be arguably the country’s leading Wall Street financier, in fact it provided Seligman (and later his brothers) with excellent training in both business and the culture of the United States. He learned to speak English fluently and brought his family to work in the business. He thus established retail stores in Lancaster, Pennsylvania, whereas his brother James established a store in Montgomery, Alabama. Joseph eventually established a store at 5 William Street in Lower Manhattan (later the headquarters of Lehman Brothers). In Watertown, NY his brother Jesse opened a store and became a good friend of Ulysses S. Grant, then a young army officer.
After the California Gold Rush, Jesse established himself in San Francisco where he established a successful retail store and became a civic leader. By the late-1850s then, the Seligmans had established retail operations in a number of regional markets. They were not particularly at this time active in finance, unlike later rivals like the Morgans, Belmont, or even Jay Cooke whose businesses were rooted in Wall Street and finance.
In 1859, the Seligmans purchased a major clothing manufacturing plant in Brooklyn, a risky proposition as “ready-to-wear” clothing was still in its infancy. When the Civil War began there was tremendous demand from the U.S. Army for uniforms, and their factory was soon working three shifts, seven days a week. The U.S. Government was notoriously slow to pay however, and after the defeat at the Battles of Bull Run, many merchants were leery of doing business with Lincoln’s administration.
The Seligmans had no such qualms. Perhaps because they were relatively recent immigrants, for them there was no greater honor than to provide supplies to the U.S. Army. They provided the Government as much credit as they needed to purchase uniforms, and they developed close ties with the Lincoln Administration and the Republican Party. As the Union’s financial problems accelerated in the early part of the Civil War, the Seligmans secured financing through their office in Frankfurt. As a result, the Seligmans are credited with opening up a market for U.S. Government securities in Europe and along with Jay Cooke, they became leading financiers of the war effort and instrumental in developing overseas investment banking in Europe.
After the Civil War, the Seligmans were able to capitalize on their ardent support of the Union, and their operations were consolidated into J.W. Seligman and Company (then still at 5 William Street, a block south of Wall Street). There they became active financiers of railroads, especially in the Midwest and Southwest. By the 1870s, J.W. Seligman was among the most prominent Jewish investment banking firms on Wall Street, overshadowing smaller firms from Jewish immigrants such as the Lehman Brothers (which had actively financed the Confederacy), Goldman Sachs and Kuhn Loeb.
Another major source of financing for the Union effort in the Civil War was Jay Cooke. Unlike the Seligmans, who began as itinerant peddlers, Cooke began his career as a stock broker in Philadelphia. By the 1860s his firm, Jay Cooke & Company, had offices on Wall Street and through a correspondent firm, Fahnestock & Co, were members of the New York Stock Exchange. The firm financed railroads and other enterprises and became adept at selling bonds to retail customers, presaging the raising of capital from public investors.
During the Civil War, Secretary of the Treasury Salmon P. Chase engaged him to sell $500 million of U.S. Government bonds to help the war effort, one of the nation’s first government war bond drives. Cooke hired more than 2,500 agents to sell patriotic Americans on the virtues of investing to support the Union cause. These bond drives were by and large successful, and Jay Cooke and Company became known as one of the most prominent Wall Street firms. Cooke invested in railroads after the war, including the Northern Pacific Railroad, but became overextended and went bankrupt at the time of the Panic of 1873.
Another major firm active in financing railroads and mining in the antebellum period was the House of Morgan, which teamed with Anthony Drexel of Drexel & Co, in Philadelphia. Joseph Morgan’s son Junius Morgan had moved to London in the 1840s where he worked with George Peabody & Co, an American banking company in London. During this period, the Morgans were primarily agents for British capital investing in the United States. Junius’s son, John Pierpont Morgan, established an office in New York as the firm’s representative on Wall Street.
This set the pattern in subsequent years, whereby the Protestant Morgan firm raised capital for U.S. enterprises from investors in England (and primarily in hard assets like railroads and coal or iron ore), whereas the Jewish firms like J.W. Seligman, Kuhn Loeb and later Lehman Brothers and Goldman Sachs, would raise capital primarily from banking relationships in Central Europe and would often concentrate in “softer” enterprises like retailing or entertainment.