The Mystery of Banking

220
The Mystery of Banking
1
In Henrietta Larson, 
Jay Cooke, Private Banker
(Cambridge, Mass.:
Harvard University Press, 1936), p. 103.
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Now indeed was their time for making money, and Cooke lost
no time in seizing the advantage. After wining and dining his old
friend, Cooke was able to induce Chase to take an unprecedented
step in the fall of 1862: granting the House of Cooke a monop-
oly on the underwriting of the public debt. Cooke promptly
hurled himself into the task of persuading the mass of the public
to buy U.S. government bonds. In doing so, Cooke perhaps
invented the art of public relations and of mass propaganda; cer-
tainly he did so in the realm of selling bonds. As Edward Kirk-
land, author of 
Industry Comes of Age: Business Labor & Public
Policy 1860–1897
, writes: 
With characteristic optimism, he [Cooke] flung himself into
a bond crusade. He recruited a small army of 2,500 sub-
agents among bankers, insurance men, and community lead-
ers and kept them inspired and informed by mail and tele-
graph. He taught the American people to buy bonds, using
lavish advertising in newspapers, broadsides, and posters.
God, destiny, duty, courage, patriotism—all summoned
“Farmers, Mechanics, and Capitalists” to invest in loans.
2
Loans which of course they had to purchase from Jay Cooke. 
And purchase the loans they did, for Cooke’s bond sales soon
reached the enormous figure of $1 to $2 million a day. Approxi-
mately $2 billion in bonds were bought and underwritten by Jay
Cooke during the war. Cooke lost his monopoly in 1864, under
pressure of rival bankers; but a year later he was reappointed to
that highly lucrative post, keeping it until the House of Cooke
crashed in the Panic of 1873. 
It is not surprising that Jay Cooke acquired enormous politi-
cal influence in the Republican administrations of the Civil War
and after. Hugh McCulloch, Secretary of the Treasury from 1865
to 1869, was a close friend of Cooke’s, and when McCulloch left
Central Banking in the United States III
221
2
Edward C. Kirkland, 
Industry Comes of Age: Business, Labor & Pub-
lic Policy, 1860–1897
(New York: Holt, Rinehart & Winston, 1961), pp.
20–21.
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office he became head of Cooke’s London office. The Cooke
brothers were also good friends of General Grant, and so they
wielded great influence during the Grant administration. 
No sooner had Cooke secured the monopoly of government
bond underwriting than he teamed up with his associates Secre-
tary of the Treasury Chase and Ohio’s Senator John Sherman to
drive through a measure destined to have far more fateful effects
than greenbacks on the American monetary system: the National
Banking Acts. National banking destroyed the previous decentral-
ized and fairly successful state banking system, and substituted a
new, centralized and far more inflationary banking system under
the aegis of Washington and a handful of Wall Street banks.
Whereas the greenbacks were finally eliminated by the resump-
tion of specie payments in 1879, the effects of the national bank-
ing system are still with us. Not only was this system in place until
1913, but it paved the way for the Federal Reserve System by
instituting a quasi-central banking type of monetary system. The
“inner contradictions” of the national banking system impelled
the U.S. either to go on to a frankly central bank or to scrap cen-
tralized banking altogether and go back to decentralized state
banking. Given the inner dynamic of state intervention, coupled
with the common adoption of a statist ideology after the turn of
the twentieth century, the course the nation would take was
unfortunately inevitable. 
Chase and Sherman drove the new system through under
cover of the war necessity: setting up national banks to purchase
large amounts of U.S. government bonds. Patterned after the free
banking system, the nation’s banks were tied in a symbiotic rela-
tionship with the federal government and the public debt. The
Jacksonian independent treasury was