Companies are established and their business expanded through the use of funds that they accumulate. These funds, investment capital, are obtained through the sale of stock, issuance of bonds, creation of corporate loans and, for already established enterprises, retention of earnings. Money from all these sources constitutes a firm’s capital. Sometimes, shares in stock are subscribed by prospective buyers before the shares are actually purchased. Though a company may have a subscription of one million dollars, for example, the money is not available for use by the company until shares are actually purchased. This is an important point to note.
It is not uncommon that a company’s authorized stock has little in common with the amount paid to the company for stock at any given time. This situation arises because stock subscriptions, when they are honored, are usually paid in installments or all at once after the subscription date but before a future deadline. They frequently are not paid at the time that the subscription is entered on the books. This means that the amount on the subscription books frequently is less than the money received. As you will see below, sometimes the difference is large because the investment is no longer attractive and some investors choose not to honor their subscriptions. Sometimes there is no difference because investors continue to view the opportunity as favorable. Since the amount subscribed is seldom a good measure of a company’s capitalization, the value of stock subscriptions should not generally be used to determine a company’s level of capitalization.
In the United States during the second half of the 1820’s a collection of private enterprises arose that we could look at as a “million dollar club”. These businesses were all capitalized at a million dollars or more. In other words, they were stock companies into which their original share or debt holders had invested at least a total of a million dollars to get the enterprise underway. There were at least six of these businesses and they were all canal corporations.
The fact that six canal companies were capitalized at a million dollars or more does not mean that the funds to build their canals came only from the sale of stock to private investors. Frequently, governmental entities were also significant purchasers of stock in the million dollar canal companies. Furthermore, these canal businesses also took out loans from an assortment of private and public sources such as the Federal government and the various individual states. In particular, debt to individuals and banks is troublesome for the purposes of determining capitalization because bonds and other instruments of corporate debt are often sold at a discount to increase the loan’s yield and enhance its desirability. In other words, the proceeds from the sale of corporate debt sometimes are not what they may appear to be at first.
What was important about these canal companies was not that they were the first at a million dollar capitalization. Their significance lies in that, at the time, they were America’s largest private businesses, excluding the banks and, to a lesser extent, joint-stock insurance companies. Nothing in the transportation or manufacturing industries was as large. Nevertheless, we also need to note that during the early 19th century banks, not canals, were the largest private businesses in America. In fact, before the 19th century, the only private corporations in America with a million dollars or more in paid-in capital funds were banks. The banking industry would later play various important roles in supporting the country’s canal boom. The canal era would be marked as one of strong ties between America’s two largest industries: banking and canals.
The banks helped to finance the building of our new nation. Their ranks included a number of firms with capitalizations of a million dollars or more. For example, in 1803 and 1805 respectively, the Philadelphia Bank and the Merchants Bank of New York were established with capitalizations raised through the sale of stock of $1,000,000 for the former and $1,250,000 for the latter. Earlier, the Bank of New York was founded in 1784 and the Manhattan Company in 1799. The former raised $900,000 in stock sales by 1791 and at least another $250,000 in 1822 from loans by two London banks. The latter was chartered with a capitalization of $2,000,000. Its subscription books were opened on April 22, 1799 and the offering was fully subscribed by May 15.
In 1818, almost 20 years after its founding, the Bank of the Manhattan Company was appointed the general transfer agent of the State of New York for all stocks and bonds issued by the state for canal purposes. This was complemented by “The Bank for Savings in the City of New York”, an unusual bank at the time with no capital stock and no shareholders which was chartered in 1819 with the goal of persuading ordinary working people that they should regularly save part of their earnings. Subsequently, the bank became one of the largest investors in New York State issued canal bonds. For example, within five years of its founding, the bank was the single largest holder of Erie Canal bonds. Collectively, through their bank, ordinary people became significant investors in the State’s canal system.
The American banking industry with its million dollar capitalizations was on the scene well before the canal era dawned and certainly before the first million dollar private canals were built in the United States. To get an idea of just how large the banking establishment was in the United States, a list published in the 1813 American edition of the Edinburgh Cyclopedia shows that at least 122 American banks were established between 1781 and 1811, a period of 30 years. 29 of these banks had an authorized capitalization of at least one million dollars. Though an imperfect picture, it is still clear that the banking business was quite substantial.
J. Van Fenstemaker’s, 1965 classic, The Development of American Commercial Banking, 1782-1837, reveals that by 1825 the number of banks in America had exceeded 300. Likewise, their authorized capital had surpassed the $150,000,000 mark. Focusing on just New York State during the period leading up to 1825, according to James Macauley’s History of the State of New York published in 1829, no less than 35 banks had been established in this state before 1825. Besides the three New York banks capitalized at a million dollars or more that we’ve already discussed, J. H. French’s 1859 Gazetteer of the State of New York identifies six more. These six banks, along with their year of establishment and initial capitalization, were: Mechanics’ Bank of the City of New York (1810, $1,440,000), Union Bank of the City of New York (1811, $1,000,000), City Bank of New York (1812, $800,000 paid in by mid-year out of $2,000,000 authorized), New York Manufacturing Company (1812, $1,000,000), Bank of America (1812, $2,000,000 paid in out of $6,000,000 authorized) and Bank of Utica (1812, $1,000,000). (Some joint-stock insurance companies were also capitalized at a million dollars or more but they were much fewer in number than the million dollar banks. One notable example was the Globe Insurance Company which sold fire and marine policies. It was chartered in 1814 and had a capitalization of a million dollars.)
1825 was a watershed year for private American canals. The Erie Canal had fully opened for business and the canal boom was in full swing. Not surprisingly, the year marks the first time that canal capitalization reached the million dollar mark. (The bank of the Manhattan Company had reached that level a quarter century earlier.) During the next five years the ranks of the million dollar canals would swell to at least six. Looking at these million dollar canal companies, it’s interesting to note that anthracite coal was a crucial cargo for them all. They constituted, in effect, a network of anthracite canals. In fact, all but one were built specifically to carry anthracite. The Chesapeake and Delaware (C&D) Canal, the only one of the group not built purposely to haul anthracite, still had an important role to play in moving the coal that came down the Delaware River. It carried the coal across the Delmarva Peninsula to the Atlantic seaboard where it was then carried northward on barges destined for New York harbor and beyond.
Sometimes, obtaining sufficient funds to build a canal was a long, complicated journey. The C&D Canal obtained $400,000 in stock subscriptions from individuals in 1802 and construction started. According to company records, however, only $103,000 was actually received from shareholders and work quickly stopped. Construction happened in fits and starts and was interrupted frequently. Little was accomplished before 1824. In 1822 the C&D Canal company was reorganized and new shares issued. In 1823 the company was finally able to sell $175,000 worth of shares to the states of Delaware, Maryland and Pennsylvania. That same year $360,000 was subscribed by private investors. Investors in Philadelphia alone purchased $230,000 with the Philadelphia Bank agreeing to buy $100,000. Additional subscriptions by private investors were made in 1824.
On December 27, 1824, the President of the Chesapeake and Delaware Canal Company reported to the United States Congress that the available funds of his company “may be assumed to be $700,000”. He asked the Congress to approve a subscription of his company’s stock and on March 3, 1825 Congress passed a law authorizing a subscription of $300,000 of C&D stock. For all intents and purposes, in March of 1825 the C&D Canal Company had access to one million dollars in capital to complete its canal. The effort had taken over two decades to raise one million dollars. Work had started in earnest in 1824 and the canal opened, at last, in 1828. The next year the U.S. government bought an additional $75,000 in stock and spent a like amount in 1830. Also, between 1826 and 1828 one million dollars was borrowed from the Bank of the United States in four loans.
(To be continued)
Copyright 2010 by Stephen Skye