The following is Methods of Prosperity newsletter number 8. It was originally deployed August 10, 2023. As of April 18, 2024, original subscribers have received up to issue number 44.
Before concluding this recap of Stephen Girard’s story, notice a few patterns. As we discover how fortunes are made and lost over and over again throughout time, the most fundamental thing is leverage. Leverage is where the inputs and outputs are disconnected. It’s not based on the number of hours that you put in. All of these characters – from Mansa Musa to Elon Musk – are doing one thing: creating value for society. The accumulation of wealth is a creative act.
Last week on Methods of Prosperity, America is proving to establish itself as a sovereign nation. Stephen Girard, a French-born son of a sailor landed in Philadelphia when the British blockade of 1776 prevented his ships from delivering goods to New York. A thriving port city, it had become a hub for trade and commerce in early America after gaining independence from Britain in 1776. Starting out in maritime trade, Girard became the richest man in the nation as a citizen of Philadelphia. He aided the city during the 1793 Yellow Fever outbreak by converting his mansion into a hospital.
The First Bank of the United States was founded by Congress in 1791 to stabilize the government and put an end to the mishmash that resulted from every state having its own currency. The largest investor in the First Bank was Stephen Girard. After 20 years, Congress shut the bank down. Girard purchased it and its assets and promptly opened his own Girard Bank. With this acquisition he became the nation’s most powerful banker almost overnight. He’d go on to increase his fortune and single handedly rescue the nation during the War of 1812. As his fortune grew, Girard invested it, mostly in real estate.
Girard later became a key figure in the Second Bank of the United States. Girard was one of the key financiers, along with John Jacob Astor, David Parish, and Jacob Barker, who pushed for the creation of the Second Bank of the United States after the War of 1812. They felt a national bank would help stabilize the currency and economy. When the initial $35 million in subscriptions for the Second Bank were not fully sold, Girard stepped in and purchased the remaining $3 million worth of shares. This helped ensure the bank had sufficient capitalization to begin operations. The Second Bank was headquartered in Philadelphia, likely due to Girard's influence and the success of his own Girard Bank in that city. This allowed the Second Bank to work closely with Girard's banking operations. Girard was described as being “frequently courted for advice and support on banking matters” related to the Second Bank. His expertise and reputation in banking were seen as valuable assets.
Girard died at age 81 on December 26th, 1831, of either the flu, or as another story has it, of injuries he’d suffered when he was hit by a wagon at 2nd and Market streets a year earlier. In his will, he established Girard College, a boarding school for “poor, white, male orphans” on land he owned in Fairmount. His will specifically forbade any clergy from teaching at the school or even entering its campus and established a 10-foot-high wall around the school to protect students from the worldly vices outside.
Part 8. John Jacob Astor.
TL;DR
In the late 18th and early 19th centuries, the fur trade flourished in Canada and the Western U.S., drawing in European settlers and involving Native American tribes. There, of course, were conflicts between Native Americans and European settlers, but the benefits from the exchange of goods provided sufficient incentives. John Jacob Astor, originally a German immigrant who started in New York City selling musical instruments, shifted his focus to the lucrative fur trade after being inspired by a Canadian fur trader. Astor capitalized on the fur market by trading with Native Americans. He expanded his business into a vast empire, the American Fur Company, which eventually dominated the fur trade in North America.
Astor’s enterprise thrived during the War of 1812. He diversified his investments by trading not only furs but also teas, sandalwood, and opium with China, significantly increasing his wealth. By the late 1820s and early 1830s, as the fur trade became less profitable due to changing fashion trends and conservation concerns, Astor wisely transitioned his focus to New York real estate, foreseeing its potential value. His investments in Manhattan, particularly during economic downturns like the Panic of 1837, paid off handsomely, making him one of the wealthiest men in America.
The fur trade was booming in Canada and the Western territories of the United States. As more Europeans arrived in the 1800’s, they pushed further west in America. Native American tribes benefited from European goods and technologies, such as metal tools and firearms. This exchange of goods improved the standard of living for Native Americans. However, there was conflict.
The son of a German butcher, John Jacob Astor arrived from London to New York in 1794 with musical instruments for sale. In 1786, only two years after his arrival in New York City, he advertised “an elegant assortment of musical instruments”. Why did he also offer to pay cash for furs? His brother George produced the instruments in London, and John Jacob imported and sold them in New York City along with pianos and flutes manufactured by his uncle’s company, Astor & Broadwood, in London. However, the demand for musical instruments during the uncertain economy of the newly formed United States of America would direct his business more in the direction of furs.
While on his trans-Atlantic passage, Astor met a Canadian fur trader who intrigued him with tales of Native Americans, beaver, bison, and grizzly bears. Following this opportunity, Astor began trading with Native Americans in upstate New York for raw furs. By the time he opened a small fur trade shop in New York City in January 1789, the musical instruments had been phased out. Instead, he went all-in on fur. That was the right move. His foresight was uncanny. But the conflict with Native Americans and Britain would intensify.
British traders and soldiers had supplied Native Americans and supported them in their conflict with the advancing U.S. frontier. Native American tribes, primarily the Dakota and Ojibwe, were key participants in the fur trade in the Upper Mississippi region. Since the end of the American Revolutionary War, the tension between the British and the Americans continued to percolate. The British claimed Canada and the Midwest from the French, and refused to abandon their fur trading posts in the Great Lakes region, preventing Americans from free trade. From the Great Lakes region to modern-day Ohio, British soldiers occupied against the Treaty of Paris. That’s why American frontier settlers living in those territories were exposed to recurrent attacks by Native American tribes. It was a precarious situation.
In 1794, the Jay Treaty between Great Britain and the United States opened new markets in Canada and the Great Lakes region, which allowed Astor to expand his business. Officially titled, “Treaty of Amity, Commerce, and Navigation, Between His Britannic Majesty and the United States of America,” and also called “Jay Treaty,” the pact draws its name from John Jay, its chief U.S. negotiator. Jay’s Treaty was intended to resolve disputes between the two nations that remained after the 1783 Treaty of Paris had ended the American Revolutionary War.
This presented an opportunity. By 1795, Astor had purchased a dozen ships and began a thriving import/export business. Five years later, the man had amassed almost a quarter of a million dollars and had become one of the leading figures in the fur trade. John Jacob Astor's wife was Sarah Cox Todd. The couple got married in 1785 and had eight children together. She was involved in some capacity in the family's business affairs. The legend is that Sarah was better at appraising furs than John was, and therefore she demanded to be paid well for her consulting services.
While the international fur trade was under pressure during the Napoleonic Wars, fur exports declined in 1807. Astor advanced while other fur traders retreated. The American Fur Company was incorporated in New York state on April 6, 1808 to control fur trading at the mouth of the Columbia River and trading posts in the Great Lakes area. This was in direct competition with Canada’s two great fur-trading companies: the Hudson’s Bay Company and the North West Company. After he formed the American Fur Company on April 6, 1808, Astor sent expeditions across the American West. On the Pacific coast, the Pacific Fur Company was his operation in the Columbia River Valley of Oregon as a subsidiary. His Great Lakes efforts were under another subsidiary: the South West Company.
Disputes over trade restrictions, impressment of American sailors, and British support for Native American tribes resisting American westward expansion led to another war with Britain in 1812. The War of 1812 had a devastating effect on commerce, including the fur trade. The trade restrictions imposed by the United States leading up to the war significantly decreased American exports. British blockades and attacks on trade goods made it difficult to conduct commerce during the war. On November 30, 1813, the 20 gun British ship, HMS Racoon, arrived in Fort Astoria, the fur post established by the Pacific Fur Company in 1811 on the south bank of the Columbia River, with orders to seize American property. During the War of 1812, many of the trading posts of the American Fur Company were lost to the British, either through conquest or sale. Stephen Girard, a contemporary of John Jacob Astor financed American forces during this time. The British phase of the fur trade ended in 1814 with the signing of the Treaty of Ghent, which officially ended the war.
With every problem comes another opportunity. While trade with China was difficult due to a trade deficit in which China wasn’t buying many foreign imports, Astor began to trade not only in furs but also teas, sandalwood, and opium. He actually made a significant amount of money from the opium trade. In 1816, he purchased 10 tons of opium from the Ottoman Empire and shipped it to China, despite the fact that China had banned the drug 17 years earlier. It may have been a legal gray area, but it paid off for him until 1819.
By 1817, the American Fur Company was the biggest in the Great Lakes region since foreign trade was banned now from U.S. territory. In 1821, the company partnered with the Chouteau interests of St. Louis, Missouri, giving the company a monopoly in the Missouri River region and, later, in the Rocky Mountains. Growing larger each year, the American Fur Company made a practice of buying out small businesses or putting them out of business with stiff competition, virtually having a market on the entire fur trade by 1830.
Besides the loss of wildlife and the rising costs of fur supply, fashion trends change. Astor’s main product was beaver fur from which hats were made. For whatever reason, they fell out of fashion. Gentlemen no longer were buying them and the supply-side was losing profitability. By 1834, Astor sold his fur-trading business and went all-in on New York real estate. Once more, his foresight was uncanny. Times Square today was a twenty-two acre parcel known as Eden Farm, which Astor acquired using $25,000 of debt service which the previous owner defaulted on. He later turned it into 141 lots, letting go for $5.1 million to developers.
Understand that the economic system is like a machine which operates in cycles. This is due to how credit works. Remember, there was just a big war. The new central bank of the United States was established by a new government and then re-established with the financial assistance of one entrepreneur: Stephen Girard in 1816. The central bank is an important player in the game. They print money and control interest rates. Every so often, a financial panic occurs. Lenders and borrowers are the same as buyers and sellers. Credit is the same as money because it helps lenders and borrowers get what they want, just as exchanging cash gets buyers and sellers what they want. Except with cash, the transaction is settled on the spot. But if all transactions are only cash transactions, there will be no economic growth. Whenever a person borrows in order to make a purchase, there will be a time in the future when they have to pay it back. That’s why credit creates a cycle.
Eden Farm, the property acquired by Astor which later became Times Square is an example of a distressed property. In a downward credit cycle, debt burdens slowly increase while income doesn’t keep up. In 1834, Astor started investing heavily in real estate. It’s likely that he was betting on a coming recession, which is a great time to invest. People cut back on spending when their debt burden increases relative to their income. Less spending is less income for someone else, which in turn results in less borrowing. Debt burdens simply become too big. This happened in 2008, due to the subprime lending crisis. A similar situation occurred in 1837.
The Panic of 1837 was bad for some but good for John Jacob Astor. At that time, many New Yorkers lost their homes to foreclosure. A moratorium by the state granted a year’s grace period for homeowners to catch up. In the same way he advanced in the fur trade, Astor expanded his portfolio when Manhattan real estate was on sale. He acquired approximately $224,000 in assets. Later, when interest rates climbed to 7 percent and property owners could no longer make payments on the mortgages he controlled, Astor promptly foreclosed on scores of them. As legend has it, he acquired an entire city block in Harlem, which was estimated to be worth $1 million, for $2,000.
In conclusion, if we learn anything from John Jacob Astor, remember his dying words. On his deathbed in 1848, he is said to have exclaimed, “Could I begin life again, knowing what I now know, and had no money to invest, I would buy every foot of land on the island of Manhattan.”
Stay tuned for next week when we meet an American shipping and railroad magnate of the same era whose net worth is equivalent to $2.3 billion today.
–Sean Allen Fenn
