John Herzog – September 19, 2013

John Herzog, Founder and Chairman Emeritus of the Museum of American Finance, had a career on Wall Street, where he served as CEO of Herzog Heine Geduld, Inc., a registered broker-dealer that was one of the largest NASDAQ market makers based on trading volume. The stock market crash of 1987 inspired him to found the Museum when he realized how little Americans knew about capital markets.

Herzog began collecting artifacts of the country’s financial past when he saw in a window, while walking in New York, an old bond certificate for sale for $5. When he examined the certificate more closely, he noticed that it was signed by William Vanderbilt and his passion for such artifacts was kindled.

Using pictures of old bond and stock certificates, banknotes, bills of exchange, and other such artifacts, Herzog took his audience on a quick overview of the development of capital markets, currencies and economic infrastructure of the country from pre-Revolutionary days to just after the Civil War. Early bonds, subscription documents and bills of exchange indicate how advanced Massachusetts was financially.  Alexander Hamilton, the country’s first Secretary of the Treasury, got the country to acquire and honor state debt issued to finance the Revolutionary War, and to issue the first Treasury Bonds. By the early 1790’s, U.S. Treasuries proved to be a success, evidence of the country’s reputation for strong credit. Hamilton was instrumental in encouraging manufacturing and introducing the elements of a modern capital system, including the country’s first central bank, the First Bank of the United States in 1791.

Once the country was under way, we see certificates evidencing financing for turnpikes, steamship lines, the Erie Canal (financed completely by N.Y. State canal bonds), railroads, and the Atlantic cable.

Banknotes, issued by something like 1,500 separate banks served as currency before the Civil War. One notable example was the “dixie,” a ten-dollar banknote from New Orleans whose nickname is from “dix”, French for 10.

During the Civil War, the Union had to raise $2 million a day, and Jay Cooke was engaged to sell bonds around the country, a responsibility he carried out with great energy and imagination. The term “over-the-counter” comes from the trade in these bonds. Bonds in lower denominations (one bearing a likeness of Abe Lincoln) were sold to encourage ownership.  The South was not as successful in its bond-selling efforts. The Union also decided to establish a national currency, replacing those myriad banknotes, any of which had little credence beyond the local area. The first “greenback” was issued in 1861. Herzog commented that recent estimates of total fatalities from the Civil War have almost doubled from earlier estimates of 638,000.

After the Civil War, we get oil company bonds, and government bonds to finance the national railroad system. The press disparages the resulting robber barons and monopolists. As an example of shenanigans in high places, Herzog mentioned Jay Gould’s efforts to prevent Vanderbilt from gaining control of Gould’s Erie Railway by Vanderbilt’s buying up shares in the market. Gould flooded the market with illegal stock certificates that he issued from New Jersey, away from N.Y. rules. Brigham Young and his 29 wives appeared on a certificate of some sort issued for the Zion’s Co-operative Mercantile Association.

In the Q&A, Herzog noted the following:

Counterfeiting was a big problem with those early banknotes. One Connecticut banknote bore the legend “to counterfeit is death.”

As a basis for all his reforms, Alexander Hamilton had read deeply and was very familiar with systems in England and Amsterdam. Herzog believes “we have not had anyone of his caliber since.” He was spectacular. Ron Chernow’s biography of Hamilton is very good.