When War Closed the NYSE for Nearly 5 Months
November 28, 2010

Silent Cal Knew About America's Business

On This Date in History:  When World War I first broke out, the United States was officially neutral.  Calvin Coolidge would later say as President that the business of America was business and that idea had already taken hold at the outset of the Great War.  America not only wanted to stay out of the war, but also expected the beligerants to adhere to international law and allow Uncle Sam to conduct business as usual.  That meant allowing the United States to continue to participate in free trade.  Well, the Brits weren’t about to give up their advantage on the high seas by allowing Germany to get supplies, even food, from overseas.  Any supplies that Germany got would add to its ability to make war.  So, the Royal Navy used its huge numerical advantage to use with a naval blockade.  The US was not happy that its ships were being stopped and searched or its ships were denied entry to certain ports.  But, typically, American merchants were simply escorted to British ports by the navy and their cargo was searched.  A process was also set up for damage reparation claims.  Fearing that good were getting to the Axis powers in an indirect way, the British expanded the blockade to include neutral Baltic states.

Sinking of Lusitania Changed American Attitude

The Germans did not have a surface fleet sufficient to blockade goods from the Allies so they went below the waves.  The Germans used their U-Boats, or submarines, to sink ships that were supplying the Allies, mainly through England.  The difference between the two was that the U-Boats dispensed with the dangerous, more acceptable practice of stopping and searching ships and simply began torpedoing ships without warning.  If the ship was suspected of supplying the Allies, the fish went in the water and down went the ship.  Activity such as this began to gain the ire of the Americans with the sinking of the Lusitania in 1915.

Solid Line Nominal Prices; dashed "real" prices

Most of the time, people think that war is good for business.  But, in this case, a compelling argument can be made that both before and after US entry into World War I, American business was adversely affected.  One casualty of the war was the stock market.  When war first broke out in 1914, the financial world was fearful of what would happen in international markets;  perhaps European stock holders would sell their equities and the market would crash.  So, in July 1914, the New York Stock Exchange closed and stayed closed for about 5 months.  The thinking was that, with the major stock exchanged closed in the US and others overseas disrupted by war, then it would be much more difficult for anyone to dump their stocks.  But, almost immediately, a curb or street exchange developed with traders working about a block from Wall Street matching up buyers and sellers for securities.  It provided some much needed liquidity and was referred to as New Street.  However, Uncle Sam ran into a problem.  The government needed money and raising taxes wasn’t enough.  They needed to sell bonds but without a market to sell its debt, then it was in trouble.  So, on this date in 1914, the only US exchange reopened on a limited basis.  Equities were still not traded but bond markets were re-opened.  A few days later, stocks resumed trading.  And, there was no crash.  But, there also wasn’t a war boom.  For the most part, the stock market went sideways except when one figures in the effect of inflation.  In that case, the real stock value was decidedly downward. 

Most of the time, we think of the US as being a wild west show when it came to financial markets prior to the Great Depression; that before 1929 there was no government regulation.  But, as this story illustrates, the Federal Government was indeed involved in trying to control market results.  In this case, it had the largest exchange in the world shuttered until the government needed it.  Talk about insider trading.  But, it was all about business and the declaration of Silent Cal was true before he was president and 80 years after his administration.  The business of America is business.

Transatlantic Cable Led To Bargain AKA The Alaska Purchase
March 30, 2010

How Did the Transatlantic Cable Lead to the Purchase of Alaska?

Great Eastern Steamship Dwarfed All Other Ships of the Day

On This Date in History:  In Antebellum America of  the mid 19th Century, a message could be sent from New Orleans to Maine in a matter of minutes.  But,  that same message might take two weeks to get to London as it was unthinkable to be able to lay a cable all the way across the Atlantic Ocean.  Unthinkable to everyone but Cyrus Field.  Field was a paper merchant who had been so successful in business that he was able to retire by age 34 when he came up with a plan to lay a transatlantic cable.   He thought that it wasn’t quite a difficult as it sounded because he figured that the cable could rest on an underwater plateau between Newfoundland and Ireland.  He was so certain of success, that in 1856 he formed the Atlantic Telegraph Company after meeting a Canadian from Newfoundland looking for investors for his nearly bankrupt telegraph concern.  Even though he had his own ideas, well-meaning citizens offered their own suggestions.  One suggested have floating call boxes so that passing ships could stop and send a message.  Another suggested suspending a cable by underwater balloons. 

Some Russians Were Rather Fond of Alaska

Aside from the hair-brained ideas, even the more rational ones faced some issues.  The cable weighed one ton per mile yet snapped quite easily in the rolling seas.  The North Atlantic is not exactly the calmest weather in the world so there were constant delays.  To help battle the elements and also haul the giant and heavy cable, Fields called on the service of the world’s biggest ship.  The Great Eastern steamship, at 32,000 tons was five times bigger than the next biggest ship.   After two years, a cable was finally laid and the continents were connected.  The great success didn’t last though because after an inaugural message from Queen Victoria to President James Buchanan, the line went dead.  Perry McDonough Collins saw Fields misfortune as an opportunity.  See, Collins had another idea.  He went to Western Union with the proposal to run a cable under the Bering Strait and then across Siberia to Europe.  Work was begun in Alaska but Fields had not given up on the oceanic route.  It took 12 years of effort and failure but on July 27, 1866 the Transatlantic Cable finally reached Newfoundland and this time it worked.  Well, that was the end of the Siberian route but the poor guys working on it didn’t learn they were out of job for a year due to….slow communications.

Collins' Men Didn't Know the Job Was Terminated For a Whole Year

Again, misfortune became a catalyst for unforseen success.  In order to work on his project, Collins had secure diplomatic connections fromboth Russia and the United States.  The efforts involved Secretary of State William H. Seward who, while helping Abraham Lincoln manage the Civil War, had also been involved in Collins Siberian scheme as well as the plans of Field.  While the  Bering Strait cable did not come about, conversations between the US and Russia continued.  Russia had established a presence in Alaska in the early 18th century but had been trying to unload it on the United States since around the time that Field had started his Transatlantic Cable project.  But, President Buchanan had his hands  full with a country heading to Civil War, though I’m not exactly sure what Buchanan was doing because he certainly had not done much to head off that great conflict. 

Cartoon Depicting "Andy" Johnson and "Billy" Seward Trying to Sell Alaska Ice Block to Congress

Seward really liked the idea of grabbing Alaska but the many other Americans weren’t too keen on the idea.  The nation was in debt and trying to rebuild the South after the war.  Alaska was wilderness and in a very inhospitable environment.  Many people thought that the idea was so idiotic that the plan was called “Icebergia,” “Walrussia,”  “Seward’s Ice Box” and, most famously, “Seward’s Folly.”  Nevertheless, on this date in 1867, William H. Seward turned his folly into reality when Russia agreed to sell Alaska to the United States for $7.2 million.  That is less than half of what was paid for Louisiana 64 years earlier.  It came out to about 2 cents per acre.   Seward had no way of knowing it, but the folly turned into literally a gold mine in just 20 years.  Gold was discovered in the 1890’s and the nations wealth increased.  Now, Alaska has oil.  The US has reaped hundreds of millions of dollars in royalties from oil produced on federal land and offshore waters of Alaska.  Then there is also the rich fishing industry in the dangerous but fruitful Alaskan waters. 

Congress Finally Forked Over the Money in August 1868

In the end what originally was a failed venture to connect North America to Europe resulted in the United States acquiring territory that initially increased it’s size by 20%.  The nation not only gained access to the obvious timber natural resources and fishing rights, but unwittingly also gained enormous access to gold.  Then when huge oil fields were discovered and the ability to bring it to market was developed, the benefit of Seward’s Folly became astronomical.  It’s hard to say which was the better deal: The Louisiana Purchase or the Alaskan Purchase.  But, one thing’s for certain, we could probably use another folly today that would bring such a huge return on investment.  But, it almost didnt’ happen.  See…Congress was leary.  The Senate has the power to approve treaties and it voted to ratify the treaty by a 37 to 2 majority.  But, the House of Representatives controls the purse strings and opponents of Seward’s Ice Box threatened to not provide the funds for the purchase.  It took a year but the Alaska Purchase Treaty was ultimately funded a year after the treaty was signed with a 113 to 48 vote.

Great Weather Ahead

Weather Bottom Line:  Enjoy the rest of the week as we move to 80 or so by Thursday and Friday.  It will be interesting to see how a weekend frontal system unfolds.  The SPC has a storm risk in Texas but I’m a bit curious about Saturday evening here.  Might be interesting but the dynamics might not come together.  Forget about it for now. Just enjoy the week.