American History Revised (5 page)

In early 1781, the Americans and the British were getting ready for the showdown and anticipated end of their long war. Washington pinned his hopes on the arrival of French reinforcements from the Caribbean. Waiting in the Caribbean, to knock out the arriving French fleet of Admiral Henri de Grasse, was commanding British admiral Sir George Rodney. Also waiting in the nearby Leeward Islands was Rodney’s junior admiral, Alexander Hood. On March 21, British spies in France prepared an intelligence report to Rodney informing him of de Grasse’s departure the following day: fleet size 173, headed by the world’s biggest warship, destination Leeward Islands. Rodney should immediately get together with Hood and prepare to annihilate the oncoming Henri de Grasse.

The report was put on a fast mail cutter headed for the Caribbean. But by the time Rodney got the report, it was too late. Delivered by British sea captains who did not know the currents of the Gulf Stream, the report reached Rodney a week after de Grasse had arrived in the Leeward Islands and fought Admiral Hood into submission.

That a huge French armada could out-race a British mail cutter across the Atlantic was not only remarkable, it was pivotal. Had Rodney been able to get together with Hood to stop de Grasse, the battle at Yorktown would not have occurred and the British would have won the war. Yankee ingenuity and inventiveness—and whales—played a key role in saving America.

Still, all was not lost for the British. In fact, they still had the advantage. Come fall of 1781, after a year of marching through the south “like an English knife through colonial butter,” the British army under General Cornwallis arrived at York town
for the pivotal showdown. It was a time, says British historian Robert Harvey, when “the Americans’ own view was that they had probably lost the war.” Even Washington was despondent: “We are at the end of our tether.” Cornwallis had slightly more troops than the rebels, but he also had to contend with a huge contingent of 11,000 French troops that had just arrived, thanks to de Grasse and the Yankee observation of whales. Finding himself outnumbered 16,800 to 7,200, Cornwallis urgently awaited the return of the powerful British navy, due to arrive on October 5 after completing repairs in New York.

Inexplicably, the British shipyard took its merry time. Observed one English staff officer, “If the Navy are not a little more active they will not get a sight of the Capes of Virginia before the end of this month, and then it will be a little too late. They do not seem to be hearty in this business.”

Pleas by Cornwallis went unanswered. Informed by the commanding British general that the British fleet would be ready in another two weeks, Cornwallis responded it would be too late.

On October 16 the ships finally were ready. They took another three days to load up with supplies and ammunition, then another five days to reach the Chesapeake on October 24, only to learn that they had come too late. Cornwallis, lacking naval reinforcements, had surrendered his entire army on October 18, six days earlier.

1782
Three times the U.S. government has teetered on bankruptcy/insolvency: 1782, 1813, and 1895. The government didn’t have the cash flow to meet its bills the following week, and it had nowhere to turn for credit. On all three occasions, it was rescued at the eleventh hour by a patriotic financier. The three patriots were Haym Salomon, Stephen Girard, and J. Pierpont Morgan.

When the colonists rebelled against England, King George was confident of victory not because he had more soldiers, but because he had more money. “My one true ally,” he said, “is the rebels’ money—or their lack of it.” He was absolutely right, but occasionally in extraordinary times one single man can make a difference. Such a man was Haym Salomon. Arriving in the early 1770s from Poland, Salomon established himself as a brilliant financier and personal friend of George Washington. Captured and sentenced to death by the British in 1776, Salomon used his mastery of eight languages to persuade his Hessian jailer to let him escape to the American side. During the Revolution, he went to Paris and, passing himself off as a French diplomat, raised $3.5 million for America from major merchant banking houses. He negotiated additional subsidies from the
governments of France, Holland, and Spain, all based on his personal credit. He also acted as paymaster-general of the French military forces in America and, when funds ran out, advanced his own money to keep the soldiers on duty.

In 1781, Congress established the Office of Finance to save the United States from fiscal ruin. The new nation had a fundamental problem, an inherent contradiction that threatened its very philosophical basis for being: taxation. “The congressmen feel they can’t tax the states,” observed Salomon, “when taxation is precisely what we all took up arms to oppose.” Until the new government straightened out its relationship with the states, the only way it could pay its bills was to borrow. But it had already borrowed up to the hilt. A new nation already saddled with debt is not an appealing credit risk. No matter, Salomon again went to work. He provided low-interest funds to members of the Continental Congress who were on their last legs. Admitted James Madison, “I have for some time … been a pensioner on the favor of Haym Salomon.” Most significant of all, Salomon provided a $700,000 loan to the Continental Government, secured by a government promissory note dated March 27, 1782. When Salomon died three years later, his estate still had the bulk of the loan unpaid.

It still does. The note was denominated in depreciating government currency, and Salomon died impoverished. The American government was a deadbeat.

The only admission of the debt owed to Salomon occurred nearly two hundred years later, in the form of a postage stamp. In 1975 the U.S. Postal Service issued a commemorative stamp that read on the back side: “Haym Salomon was responsible for raising most of the money needed to finance the American Revolution and later to save the new nation from collapse.” It is probably fair to say that most people never read it before licking the stamp.

In April 1813, at the height of the War of 1812 against Britain, the United States again was in dire straits. This time, unlike in the American Revolution, the United States did not have France to bail it out.

The brilliant secretary of the treasury, Albert Gallatin (treasury secretary under two presidents for thirteen years—a record that still stands), developed a plan to raise $16 million. He secured tentative subscriptions of $5.8 million from the public and $2.1 million from a small group led by John Jacob Astor, the second-richest man in America. Total to date: $7.9 million. Still to go: $8.1 million. Gallatin had only seven days left before the closing date. If he did not raise the balance by then, the offering would fail and the money held in escrow would have to be returned.

Where to go for the $8.1 million?

The only hope was Stephen Girard, the richest man in America. Girard had arrived
in Philadelphia as a young French sea captain at age twenty-one and made his fortune in mercantile trading and banking. But there was a slight problem—in fact a very big problem. A year earlier, Girard had turned down the United States Treasury’s request for a $500,000 loan because it refused to help him get a charter in his fight with other Philadelphia banks trying to keep him out of the banking business. Since then, the U.S. had upset Girard even further by filing a lawsuit claiming one of Girard’s ships had brought British goods into an American port illegally—even though this ship had been given specific clearance by an American admiral.

One imagines that a meeting between a U.S. treasury secretary going, hat in hand, to a civilian being sued by the U.S. government must have been very interesting. Be that as it may, and it would have been most improper to insist that the U.S. drop its lawsuit as part of the deal, Girard readily agreed to help. He imposed no conditions on his adopted country.

There was another obstacle, however, unsaid by both parties: $8.1 million was more than Girard’s net worth. To get the deal done, he would have to raise money from others. He would have to achieve what a brilliant treasury secretary, backed by a popular president and the entire U.S. government, had been unable to do.

But Girard had not become America’s first tycoon for no reason. He signed an agreement with Gallatin. Putting his considerable credibility on the line, he went to work identifying potential fellow investors and restructured the deal so that payments could be made in installments and interest collected at the beginning or at the end, depending on the investor’s circumstances. Within seven days Girard had put $2.5 million of his own money up front and raised the full balance from others. It was the first investment banking deal ever done in the United States, and it saved America.

“Many are willing to risk their lives for their country, but few are willing to risk their fortunes,” observed one historian. Girard understood the urgency of the moment, that “there could be no victory, no war, without money.” Money for war was desperately needed at the time. When Gallatin submitted his $19 million annual budget to President Madison, he allocated $17.9 million—94 percent—for the War and Navy departments, and only $1.1 million for running the government.

After the war, Girard received no more thanks than had Haym Salomon (though he did get repaid). He was still being hounded by Treasury customs officials over his ship’s alleged violation, this time in the form of a penalty. Congress stepped in and absolved Girard from the penalty, but required him to pay double duty plus interest on his cargoes. Congress also failed to make this ruling automatic, meaning that Girard had to go to court to get the ruling enforced. He finally succeeded, but it took
him six years. So much for risking his fortune for his country.

J. Pierpont Morgan would not make the same mistake. When the U.S. Treasury came to him during the Panic of 1895 to bail out the government, he made sure he would be repaid in full and have no lingering problems thereafter. Especially since he was quite angry.

Ignored by politicians and journalists after warning that the nation was printing too much money, Morgan got his satisfaction when he got called for an emergency meeting by President Grover Cleveland. After cooling his heels for a day—Morgan was not a man who liked being kept waiting—he finally had his meeting at the White House. Informed there was only $9 million of gold left in the Treasury’s vault in New York City, Morgan said, “Mr. President, the Secretary of the Treasury knows of one check outstanding for twelve million dollars. If this is presented today, it is all over.”

The treasury secretary confirmed Morgan’s statement. The president was cornered—and he knew it. Like Albert Gallatin eight decades earlier, he had no choice but to acquiesce to the financier who sat on the opposite side of the political fence. These were the times of populism and the fiery rhetoric of William Jennings Bryan (“You shall not crucify mankind upon a cross of gold!”). American farmers, burdened by falling agricultural prices, wanted the government to inflate the money supply so they could repay their loans with cheaper dollars. Arrayed against them were the bankers of the East, who wanted a strong, gold-backed dollar to maintain the value of dollar-denominated bonds sold to foreigners. When European investors became nervous that the Populists would prevail and inflate the money supply, they started unloading their bonds for gold. In 1894, U.S. gold reserves dropped more than 50 percent from $100 million to $45 million. In early 1895, gold losses accelerated to almost $2 million a day, raising fears that the government would default and the economy would collapse.