In the aftermath of the Civil War, one leader of the Confederate States of America supposedly stated, “The Yankees did not whip us in the field, we were whipped in the Treasury Department.” Over the war, the Treasury sold over $6.2 billion in bonds, an unprecedented war financing effort. Such funding was only possible by the advisory of Jay Cooke, one of the first investment bankers. His strategy was revolutionary, and many of his tactics are still used today. While wars were traditionally funded by financial institutions, Cooke marketed directly to the ordinary people of the United States. Converting patriotic and anti-slavery sentiments into credit, Cooke sold 83% of registered bonds to the public. Ultimately, he provided financial education to everyday people, uplifting a class that had rarely before received the opportunity to invest their savings. The popularization of Treasury bonds also provided an extensive source of capital to New York’s financial center, which further developed the US financial system. Empowered by the support of everyday people, Jay Cooke successfully funded the war effort, improving both the government and the financial system.
At the start of the Civil War, the federal government faced financial difficulties. After facing four years of deficits, the Treasury was low on cash and was soon spending $1 million a day. The US needed financing soon. The Secretary of the Treasury, Salmon P. Chase continued the antebellum practice of funding wars through loans purchased mainly by banks. However, when he approached the financial institutions in the summer of 1861, seeking $250 million, they were reluctant to lend. Military defeats, especially Bull Run, had made the Union’s debt too risky to purchase–it also did not help that Chase had no experience in finance. Without sufficient funding, the government was forced off the gold standard in 1862.
With the Union’s future uncertain, Chase gave Jay Cooke control over US debt issuance. A devout Christian, Jay Cooke had fought for the anti-slavery cause throughout his life–he allegedly even assisted in the Underground Railroad. In 1861, he established the banking house Jay Cooke & Co. in Philadelphia, the first modern investment bank, and had already exhibited much skill in issuing debt. As he truly believed God chose him to help the Union win the war, Cooke was fully committed to financing the war effort and even invested much of his money in Treasury bonds.
On March 7, 1862, Secretary Chase appointed Cooke the “Subscription Agent for National Loan.” Cooke did not just have the financial savvy Chase lacked; his strong anti-slavery beliefs and financial commitments provided Cooke with credibility when selling debt. He invested in every bond he sold. His first big test was the government’s $500 million 5–20 bond campaign. The bonds were callable in five years and matured in 20, hence the name. The size of the campaign was unprecedented and over twice the combined cost of the War of 1812 ($110 million) and the Mexican-American War ($82 million).
While wars were traditionally financed by banking houses and wealthy individuals, Cooke believed he could receive much of the funding from everyday people, who he felt were sympathetic to the Union cause. However, most of the public was unfamiliar with investing and needed to learn how to loan to the government. To resolve this, Cooke sought to provide financial education to everyday people. He wrote articles on investing, such as “The Best Way to Put Out Money on Interest,” and he established night agencies across the US where prospective investors could go after work to listen to educational sessions on investing and ask questions to advisors.
Most public bond sales were due to news advertisements. Cooke even wrote advertisements himself, calling on “every Capitalist, be he large or small, or Merchant, Mechanic, Farmer” to “invest at once his spare funds.” Cooke believed that he could play off the patriotic and anti-slavery sentiments of the Union, emphasizing that loaning to the government was just as important as fighting for it. To receive bonds from as many people as possible, Cooke issued bonds in denominations as small as $50. Cooke also offered options on bond issues to newspaper agencies, giving them a financial incentive for the campaign’s success–the options led many publications to produce patriotic stories on the war and positive articles on the bond drive.
Cooke also hired field salespeople to sell bonds in rural areas directly to investors. Throughout the war, he employed around 3,000 salespeople who traveled as far as California and even into the Confederacy later in the war. Even parts of Mexico were sold bonds. Cooke also regularly corresponded with several salespeople to understand the political sentiments of the different parts of America. By understanding whether different regions supported the Union, Cooke could better direct his legion of salespeople.
Through the government, Cooke syndicated other banking houses, which followed Cooke’s marketing strategy and successfully sold bonds. Cooke and his network sold all $500 million of the 5–20 bonds. The campaign achieved $3 million in daily sales, causing backlogs at the Treasury when issuing the bonds. Cooke later completed a $600 million 7–30 bond campaign, the other large issuance of the war. In the campaign, he continued to primarily sell to ordinary people and even oversold the issue for $830 million.
A large secondary market for Treasury bonds emerged in New York City. In January 1865, bond sales topped 250,000. The extensive war financing helped develop New York’s financial center. Between 1864 and 1870, the number of registered bankers and brokers in the city increased from 167 to 1,800. Accumulated by Treasury bonds, the immense capital consolidation significantly expanded the US financial system.
Cooke manipulated prices in secondary markets to ensure confidence in Treasury bonds. Due to his efforts, bonds never sold below par. Cooke popularized this tactic, the stabilizing bid, which is still used today. Cooke’s most important manipulation occurred the Monday after President Lincoln’s assassination. Treasury bonds dropped at the start of the trading day, and markets grew nervous. Cooke then conspicuously walked down Wall Street, buying bonds with his own money–this action would later serve as an example to JP Morgan in 1907. By the closing bell, bonds returned to a premium, and Cooke even profited from his stabilizing bid.
The war caused the Union government and the US financial system to develop a mutually beneficial relationship. Jay Cooke and his bankers provided the government with a much-needed $6.2 billion. Meanwhile, the emergence of the Treasury market allowed the financial system to blossom. However, none of this could have occurred if US citizens had not put their money behind the government. Millions of US citizens backed the country’s democratic principles and received compensation for their support.
While today’s financial system has become incredibly complex and confusing, the simplicity of Cooke’s requisite system makes the campaign’s public impact evident. In Cooke’s words, “people of both sexes, of every age, class and description, and of all colors” were introduced to investing and benefited financially. The war introduced the opportunity of investing to classes that were usually ignored. As unique as this story is, Jay Cooke’s actions show how financial institutions can improve the lives of everyday people.