1 – Business Environment – 1815 to 1894
1 – The Chicago and U.S. Business Environments – 1815 to 1894
(This summary is particularly drawn from the two volume, The Growth of Chicago Banks, by F. Cyril James, published in 1938 by Harper & Brothers, and sponsored by the First National Bank of Chicago. The author is privileged to have one of the limited editions of this book prepared for the sponsor and autographed by the author, which edition was the gift of Mr. Edward F. Blettner, formerly Vice Chairman of the Bank. In the 1970s, Ed was a consultant to the management and Board of A.G. Becker & Co. Ed received his copy of the James volumes with the compliments of Edward Eagle Brown, President of the bank in 1938, who as a young banker, probably personally knew A.G. Becker. Numbers in parenthesis refer to the pages in the James book from which the quotation or summary is drawn).
1816 to 1848
The financial development of Chicago, originally known as Fort Dearborn, began with the territorial incorporation of that village, in 1816, with the Bank of Illinois. The development of banking in Chicago and Illinois over the next 50 years is succinctly summarized by James, as follows:
"From 1816 to 1845, Chicago was engulfed in the fabulous attempts of the State of Illinois to achieve prosperity by a governmental program of inflation and public works. Banks were the tools of politicians, and they were destroyed completely in the collapse of the fiscal economy of the state. After 1845, there followed a long and painful period in which an attempt was made to build up financial institutions of a more permanent kind. Private bankers attempted the task, with varying success; state-chartered banks flowered and withered. With the single exception of the Merchants Loan and Trust Company, it was not until the creation of the national banking system, in 1863, that the city acquired banking institutions that were soundly managed, and equipped with large resources, but from that moment the influence of state factors upon the growth of Chicago banks diminished steadily." (pp xiv-xv)
In 1848, the Illinois and Michigan Canal was completed, after 30 years of construction, and the first railroad line arrived in Chicago. From that point forward, Chicago grew as a major transportation center, boosted by the enormous business activity in the 1860s as a result of the Civil War effort. During this period, the city was emerging as the primary financial center for the western U.S., especially as a Chicago-centered correspondent banking network was developing over this vast western region. Chicago was also emerging as an important manufacturing center and food processor, with emphasis on meat packing, and as the trading center for produce and grain.
1850 to 1860: R.K. Swift
In the decade 1850-1860, perhaps the most prominent "banker" in Chicago was Richard Kellogg Swift, known as "R.K. Swift." Swift was born in 1813 in upstate New York and migrated to Chicago in the late 1830s, where he became a pawnbroker. In about 1850, he formed a "bank," taking deposits and making loans, but particularly offering a range of financial services meeting the needs of a heavy inflow of immigrant citizens and travelers abroad, as well as services meeting the needs of local businesses, such as the brokering of trade notes. This was also a period of dynamic growth in Chicago's population and business activity. The Swift bank operated progressively under various names, and had a New York branch. R.K. Swift was a unique, creative, and risk-taking financier who in many ways characterized the buccaneering spirit of the emerging Chicago business community. (For more information about Swift see Appendix-2)
1855 to 1877: Greenebaum Banks
In 1855, the private banking business of Greenebaum & Brothers was founded, by Henry and Elias Greenebaum. In 1857, the business obtained a state bank charter. Rather quickly the Greenebaum activities overlapped but then succeeded those of R. K. Swift. Henry Greenebaum rather quickly became perhaps the most prominently known Chicago banker of the next two decades. All through the 1860s and well into the 1870s, Henry Greenebaum's reputation grew locally as well as throughout the eastern financial community and in Europe, especially in Germany. According to James, by 1867, the Greenebaum bank was the third largest among the state chartered and private banks in Chicago (pagAe 378). Greenebaum was actAeve in a wide range of civic as well as Jewish causes and his name was regularly in the newspaper. Following the passage of national banking legislation, Greenebaum formed the German Savings Bank in 1869 and the German National Bank in 1871, taking minority interests in each institution as an individual and through the family's central company. At about this time, the family opened a separate subsidiary in New York and changed the name of the Chicago holding company to Henry Greenebaum & Co.
In 1871, or shortly thereafter, A.G. Becker started his Chicago business career as an employee of the German National Bank, working for his brother-in-law Herman Schaffner, who was Cashier of the Bank.
1871: Great Chicago Fire
In the fall of 1869, the national banking markets suffered from the ill effects of speculation in, and then an attempted corner of gold, followed by a price collapse, all engineered by Jay Gould and Jim Fisk (pp. 390-394). In 1870, banking in Illinois was strengthened by the passage of tougher regulations. The economic outlook was favorable, but tragedy struck. On Sunday, October 8, 1871, the great Chicago fire raged for two nights and a day, destroying a large segment of the central city and rendering many people homeless. Except for three banking institutions, all bank buildings and many bank records went up in smoke. For example, the building housing the Greenebaum banking enterprises was completely destroyed, but the businesses were continued in temporary quarters until a new bank building was constructed and occupied.
Reconstruction of the city began immediately with insurance. Eastern and foreign capital flowed in rapidly to support reconstruction. In the meantime, national expansion and optimism, underway since 1869, continued unabated, buttressed in part by significant railroad expenditures financed in good part by capital from abroad. Speculation in railroad securities and commodities grew with the availability of abundant credit. Interest rates were increasing in late 1872 into spring of 1873. The stock market was booming.
However, in early September, a New York financial company active in railroad financing closed its doors, followed shortly by a New York private banking house. On September 18, Jay Cooke and Company, the preeminent banker to the U. S. Government during the Civil War, closed its doors. The bubble was pricked. Panic ensued. Stock market prices declined. Bank runs took place with a domino effect. Within days, many small banks and brokerage houses went out of business.
After the panic of 1873, real estate prices fell precipitously, affecting institutions which lent heavily to finance land development (p 502). In the summer of 1877, two institutions suspended operations in light of loan delinquency and asset value reductions. In August, the largest savings bank in Chicago closed its doors and suspended payment of deposits. A receiver rather quickly determined that the bank's President had financed personal projects with bank funds, creating worthless, unsecured personal notes as bank assets, and then absconded to Europe with the bank's residual cash (p 502). This led to runs on other city institutions. Very loose banking practices and other embezzlements by management were uncovered over the balance of the year (p 504). The Chicago economic environment during 1877 was further damaged by a major railroad strike and accompanying riots (p 522).
Finally, as James reports, these developments "engulfed the group of institutions operated by Henry Greenebaum, all of which appear to have been unnecessarily tied up with his own personal fortunes" (p 505). On December 5, 1877, the management of the German National Bank asked the depositors for patience to provide time for an orderly sale of assets. But trust and confidence were missing from the business environment. Fear prevailed. Thus, on December 6, the German National's shareholders decided to suspend operations and liquidate the Bank. With this action announced, a run was made on their sister institution, the German Savings Bank which also suspended operations. The New York Greenebaum company simultaneously was compelled to make an assignment for the benefit of creditors. After a few weeks, the parent family holding company, Henry Greenebaum & Co. closed its doors.
1878 to 1893: Herman Schaffner & Co.
The 15 year period of the existence of Herman Schaffner & Co., between 1878 and 1893, was one of great financial turbulence and cross-currents in Chicago and across the nation. The period was marked particularly by extensive labor unrest and militant unionism met by obstinate management, especially in the railroad and meat packing industries. The Haymarket Massacre of 1886 symbolized a peak of this unrest with rising accusations of anarchy and communism among embittered leaders in the business community. Meanwhile, in New York City, the failure of some large banks and brokerage firms took place in a May of 1884 short lived panic, causing significant though temporary fluctuations in the level of interest rates, deposit balances, and stock market prices. Credit ease in the later 1880s in part contributed to a growing level of railroad investment but, at the same time, encouraged speculative activity of all sorts -- land, commodities, and urban transit systems in particular.
In 1886, Charles Yerkes, a major investor-speculator in interurban railway operations, gained control of the North Chicago and the West Chicago Railway companies. In 1887, "Harper," (an alias for E.L. Hopper), a prominent operator on the Board of Trade, attempted to corner the wheat market. This effort, after six months duration, collapsed resoundingly, taking down a major Cincinnati bank and a number of brokerage houses. Harper was later indicted and sentenced to a prison term. Trading on the Chicago Stock Exchange, almost morbid in 1887, became very active by the early 1890s. Municipal bond investment and trading was growing as commercial banks became active dealers, along with the only major investment house in Chicago at the time, N.W. Harris & Co. (predecessor to the Harris Bank & Trust).
Despite a generally expansive national and local economy during the later 1880s into the 1890s, as James says,
". . . the expansion was speculative rather than constructive. In so far as there was a railroad boom, it was marked by security manipulation and watered recapitalizations, rather than by the laying of new track or the physical improvement of existing facilities. Agricultural prosperity, where it existed, depended more upon the manipulation of prices than upon increased crops, and it is typical of the period that there should have been a succession of attempted corners on the Board of Trade which culminated in the notorious wheat corner organized by Cudahy, and other leading Chicago operators, in the spring of 1893. It is also typical that Cudahy should have been financed by New York banks, rather than Chicago institutions, since the latter were much less interested in speculative operations. Perhaps, too, there is something significant in the fact that these years witnessed the first examples of modern bank-banditry in the depredations of the notorious Dalton Gang, which culminated in the sensational holdup of both the banks in Coffeeville, Kansas. Even a modern gang would find it hard to improve on the brazen technique of that affair.
To suggest that Chicago was immune from the speculative spirit of the age would be absurd. Moreover, it would be contrary to all the traditions of the city. But it is nevertheless true that, during these years, Chicago achieved a considerable measure of constructive improvement that could not have been equaled by any other important city in the United States. Eastern capitalists, under the leadership of Yerkes, were expanding the street-railway system rapidly, and European investors were again focusing their attention on the city despite the insistence of the Tribune that the new securities "most successfully floated abroad recently are those of the 'scaly' kind." Real estate improved steadily, and building activity spread steadily outwards from the center of the town to the suburbs that were rapidly rising on land that had been desolate prairie a year or two before" (pp. 556-7).
The general economic and inflationary expansion through 1892 turned, almost to be predicted, into a mammoth bust in 1893, just as the Columbian Exposition was opening. As James reports:
". . . Chicago, and every other city in the United States, was standing nervously on the threshold of panic at the very moment when Cleveland touched the electric button that opened the World's Fair. The surging speculation that had carried the nation along since 1890 was already wavering. That fact could not be driven from the thoughts of businessmen by all the marvels of the White City with its domes like those of Ravenna, its colonnades that vied with Rome and its lagoons so redolent of Venice. At the beginning of 1893, business was decidedly dull and, although the stock market experienced feverish spasms of activity during the spring, investors were apathetic. Business in general was characterized by a lethargy that contrasted strangely with the operations of earlier years, and many railroads, strained by past expansive efforts, were on the verge of bankruptcy. Before the end of February, the Philadelphia and Reading Railroad, reputed to be among the strongest in the country, passed into the hands of receivers." (pp. 576-77)
And then as spring arrived:
"At the beginning of May, the failure of the National Cordage Company provided the spark. The concern itself was of no great importance, and its financial position had been recognized as unsound for several months, but the failure precipitated a catastrophic decline of security prices. Wall Street was virtually in a panic and a wave of suspensions and bankruptcies swept across the country. The house of cards had collapsed. (pp 579-80)
“Chicago, riotously speculative in its enthusiasm for the World's Fair, was ripe for panic. During 1892, the volume of building activity had been approximately 50 per cent greater than during the busy year of 1890, and much of the money necessary to finance this enterprise had come from Chicago banks and local capitalists. Since the Fair was expected to attract millions of people to the city, and to encourage each visitor to spend his money liberally, extravagant investment was encouraged by the prospect of generous reward. Even the older and larger banks had been persuaded to advance money to the optimists, although the caution born of experience had set reasonable limits to the aggregate amount of their loans, while several of the newer institutions had plunged recklessly into the wave of speculation with blithe enthusiasm.
“During the early months of 1893, there was an appreciable weakening of the real-estate market; some of the smaller financial houses that had been particularly interested in this type of business closed their doors. Moreover, when panic hit the New York stock market in May, security prices in Chicago declined in sympathy. None of these developments appeared unusually serious, however, and, by May 6, the Economist was able to scan the horizon and report to its readers that "the whole financial sky has cleared somewhat."
But not for long. Only a few days later, the Chemical National Bank (Chicago) suspended operations as a result of inadequate capitalization if not fraud, incompetent management, and shoddy governance. This collapse led to the suspension of a branch at the fairgrounds holding deposits of exhibitors, with prominent adverse publicity. (p 582) Shortly, the Columbia National Bank along with its affiliate, the United States Loan and Trust Co., closed their doors. These institutions were part of a chain of banks in Indiana and Illinois assembled over the recent four years by Zimri Dwiggins in a rather convoluted corporate Ponzi scheme. But, for three weeks after the Columbia failure, there was again the feeling that the panic had passed.
Schaffner Bank Closes: Ripple Effect
But then, on Saturday, June 3, (1893), as James reports:
". . . the well-known financial house of Herman Schaffner and Company broke under the strain. Owing to the diminished volume of the commercial-paper business, the firm had lent funds to finance speculators in street-railway stocks and, when the bottom dropped out of the market for such securities, Schaffner hired a boat and rowed out into the Lake to meet his death. He did not return, and the firm passed into the hands of a receiver." (p. 587)
And as James goes on:
"When Monday dawned, the fears of the population, growing steadily over the week end, had crystallized into something approaching a panic. Long lines of frightened depositors waited outside the doors of every savings bank in the city. At the Illinois Trust and Savings Bank, thirty-five thousand depositors presented themselves at the counter during the day, and the perspiring tellers kept paying out money until three o'clock in the morning. At the Hibernian Banking Association the run was less severe, but the details of the story are much the same, while the Union Trust Company and the Prairie State Savings and Trust Company had similar experiences. Only at the Globe Savings Bank and the Dime Savings Bank was any effort made to enforce the rule that depositors must give notice of withdrawal, although it was agreed after the run had finished that such action would be taken by all banks in future. Most amusing of all was the attitude of Lazarus Silverman. When the run on his bank started, he stood beside the teller and helped him build a fortification of greenbacks and yellow coin on the paying counter in view of those who stood in line waiting to draw their savings. It was good psychology." (pp. 587-8)
“The commercial banks, moreover, shared some of the discomfort of the savings institutions. City depositors and country bankers both took steps to draw down their balances, and the Chicago banks themselves hastened to shift as much of the burden as possible by drawing currency from New York. Only in the case of the American Exchange National Bank did the drain prove serious, however, and in that case the Clearing House banks promptly came to the rescue by advancing $475,000 to the distressed institution." (p. 588)
“As a matter of fact, this June panic was largely confined to the poorer classes and the smaller enterprises; important bankers and leading businessmen appear to have kept their heads. Even the small depositor recovered confidence after he had discovered that all demands were being met promptly, and the panic subsided rapidly. By the end of June, a substantial improvement was evident in regard to public psychology, which reflected itself in a lessened stringency at the banks, and on July 28 the American Exchange National Bank was able to repay to the clearing banks the last installment of the loan that it had received during the run." (pp. 588-9)
However, although by late June, depositor concerns had subsided, it was still a fact that "some 3,000 business enterprises had failed in various parts of the U. S. during the first part of the year," and this had created a high demand for currency ending up primarily on the New York City banking system. (p 591) The banking leadership in New York, and in Boston and Philadelphia, had taken steps to strengthen the ability of their banks to withstand withdrawal runs. By late July, however, the report of these moves proved inadequate after the failure of a major bank in Missouri. Once again, a domino effect rippled throughout the west and Midwest, and then back into Chicago with the failure of a major insurance bank. The storm was not stemmed until the First National Bank ordered gold to be delivered from London to its Chicago office, which, when followed by other Chicago banks, resulted in some $8 million in gold being delivered to Chicago banks by mid-August. (p 605)
Thus, by the end of 1893 and moving into 1894, although a general economic depression was still in the offing, and loan losses were being toted up and charged off, bank liquidity had been restored. At the same time, agricultural prices were depressed, unemployment was mounting, and labor unrest was becoming severe, symbolized by the Pullman strike resulting in martial law and blood shed in Chicago in mid-1894.
A.G. Becker Considers Future
This was therefore the general business environment in which A.G. Becker, in his mid-thirties, had to consider his future. He had to come to terms with the tragic, shocking business behavior and suicide of his brother-in-law. He had to provide care and concern to his sister, her family, and to his own family. He was at the same time becoming the object of animosity and disbelief by many friends, and by depositors and lenders to the Schaffner Bank. He faced various law suits and even an arrest. He must, too, have undergone introspection about the bank's and his brother-in-law's activities, and about his own role in the Bank. He had to cope with the financial community's feeling that the Schaffner Bank failure had contributed to the general banking panic later that summer and into the fall. He had to work with the receiver and former employees to carry out the orderly liquidation of the Schaffner Bank's assets. In that process, he had to face very directly that there was a major deficiency of funds with which to pay depositors.
However, it was during this period that A.G. Becker also realized that there was significant personal and business goodwill in the Schaffner commercial paper relationships with issuers and investors. Within the Schaffner Bank, he had taken a central role in this core business, and had built up those valuable relationships over the years. From what he said to various close friends and his family, it is clear that A.G. Becker resolved very early in this troubling period to repay all Schaffner depositors, if it was within his future financial capacity to do so. To be able to pursue that goal, he would need business profits. Thus, with the proceeds from his brother-in-law's life insurance being advanced to him by his sister, within a few weeks of the Schaffner failure, he established a proprietorship, A.G. Becker & Co., which, on July 2, 1894, was succeeded by A.G. Becker & Co., Incorporated.