CHAPTER 13Short Engagements in Banking and Land Sales

In 1869, Albert became a banker. As with insurance, he entered the industry because George, a director of the Third National Bank of Chicago since 1864, had done so. Albert became a founding director of Chicago's National Bank of Commerce (NBC) when it opened in September 1869. D. A. Kimbark, partner in a firm of railway equipment manufacturers and an early Pullman excursion guest, invited Albert to invest in the new institution.¹ Albert's involvement was mutually beneficial to the bank and to his growing reputation. Newspaper stories puffed NBC as worthy of depositors’ trust because of the “substantial character” of its directors. Within a week of opening, however, the board replaced the president, the accountant, and the teller, foreshadowing future travails.²

NBC allowed Albert to indulge his growing desire to invest in manufacturing. He had little interest in the workings of finance and virtually no knowledge of how a bank actually functioned, but investment capital was in short supply and Albert's directorship gave him a path to taking out loans. NBC was one of the numerous banks created under the National Banking Act passed during the Civil War. Authorized despite opposition from other banks, the law required national banks to maintain a minimum ratio of deposits to loans as a guarantee of stability and longevity.³ The comptroller of the currency audited the new institutions semiannually, offering the appearance of a safe alternative to chronically underfunded and occasionally incompetently managed state and local banks.⁴

The number of national banks grew dramatically in the postwar era, but the best-laid plans did not always succeed, as the story of NBC demonstrates. The historian Thomas A. Mackay found that “reputability and trust could be entirely cosmetic” and often provided a misleading guide to individual character and ability.⁵ The brief existence of NBC would demonstrate the validity of Mackay's assessment. Promises and reputations hid deep flaws. The first government audit, in 1870, uncritically labeled NBC directors “men of good standing,” claiming that “some of them are men of large means whose influence must be beneficial to the further success of the institution.”⁶ The reports of this examiner, Charles Farwell, were uniformly positive, and he even cosigned a letter refuting a story in the Chicago Times charging that financial fragility had forced the directors to replace bank personnel a year after it opened.⁷ Farwell, who would later serve as a US senator for Illinois, turned a blind eye to the facts because of his connections to Albert and the other directors. He had ridden on at least one Pullman excursion and invested in the Chicago Daily Inter Ocean newspaper, where Albert had many contacts.⁸

By September 1870, NBC had a new president, B. F. Hadduck, and a new cashier, Edwin Maynard. Hadduck at least had banking experience, having served as the vice president of Chicago's Treasury Bank.⁹ The federal examiner gave this potentially alarming instability a positive spin, writing glowingly of how “the change in the ownership of the controlling interest and management of this bank has been of material interest to it. The present officers are cautious and conservative.”¹⁰ What the examiner did not mention was the heavy debt NBC had incurred by purchasing unsecured and ultimately worthless bonds from other banks. In addition, NBC held almost no real estate, a temporary advantage after the Great Fire of 1871 but a perilous position in the long run. In the short term, the fire destroyed the bank's offices and Hadduck's property, contributing to his death from pneumonia contracted during the “fatigue, exposure, and excitement” of the crisis.¹¹ Though a careful steward of the bank's resources, Hadduck lacked vision, and his conservatism kept NBC from competing against the city's larger national banks. He also required directors to perform almost no work in connection with the institution. Left to its own devises, the bank remained a visible, if not particularly vigorous, presence in Chicago financial circles.¹²

NBC suffered its first major financial blow in 1873, when a national economic downturn ended almost a decade of growth. The failure of the Philadelphia banking firm of Jay Cooke & Company in September 1873 and an ensuing run on banks across the United States plunged the economy into recession. While this compounded the problems Albert faced following his insurance company fiasco, the macro disaster did not come as a complete surprise. Warning bells had been sounding to those willing to listen for them. The market for American securities in Europe had deteriorated because of instability and uncertainty resulting from the wars leading to the unification of Germany. Facing a credit crunch, many small American banks had closed in the spring of 1873. In the wake of the collapse of Jay Cooke and Company, manufacturing output fell, foreign trade volume declined, railroad expansion stopped, and interest rates, wages, and prices tumbled over the next five years. Not everyone suffered, however. Like many other corporations, lower interest rates enabled Pullman's Palace Car Company (PPCC) to expand by borrowing money, but its stock price stagnated. For Albert and George, this meant their personal wealth declined in value while the company prospered.

Following Hadduck's death, Ohioan P. C. Maynard—brother of cashier Edwin and himself a former cashier—became president. Albert was regularly reelected director during annual balloting. The Panic of 1873 damaged but did not destroy the banking sector in Chicago, though the city's national banks suffered when country banks withdrew their seasonal deposits to repay farmers demanding cash to buy seeds and equipment. NBC was one of six Chicago national banks that suspended operations during the panic, and two of them did not reopen.¹³ Despite a tottering economy and runs on its limited assets, NBC survived and appeared to be on the road to recovery.

The effects of mismanagement combined with the Panic of 1873 became clear in February 1876 when the comptroller of the currency appointed a new examiner, William P. Watson. Horrified by what he found in the NBC books, Watson's first report was scathing. He wrote that the directors—including Albert—controlled too few shares, the bank owned corporate stocks that had lost half their value, and its assets included a building it needed to sell but for which there were no buyers. Worse, “the management of this Bank is solely by the President and Cashier, the meetings of Directors being rare.” In a damning indictment of Albert and the other board members, Watson asserted that the “directors seem to have but little interest in [the bank's] … affairs.”¹⁴

Watson reached his shocking conclusions not because of a material change in the status of the bank since Farwell's last audit—there had been none—but because he paid close attention to the records in front of him. Blinded either by his friendships with the directors or by poor accounting skills, Farwell had taken a laissez-faire approach to the bank. The reality of NBC's situation generated nervous conversation behind the scenes and, in his second report of 1876, Watson wrote, “There is some prospect of the Bank soon going into liquidation, a thing apparently desirable, as the Institution is making no money, and the business gradually decreasing. If the assets were now forced to a sale there can be no doubt of a deficiency to pay stockholders, but, carefully handled, they will pay par.”¹⁵ Par, in this instance, was a best-case scenario for Albert.

Watson's blunt analysis—which included criticizing Edwin Maynard's perpetual $5,000 overdraft—spurred the cashier into action. Writing to the Treasury Department in Washington, DC, for guidance, Maynard liquidated the bank's assets and transferred the remaining funds to the Central National Bank (CNB) of Chicago, which proved something of a poisoned chalice for the recipient.¹⁶ NBC entered voluntary liquidation on December 2, 1876, bringing to an end Albert's dalliance with banking.¹⁷ It also signaled the beginning of the end for CNB, which closed the following year with a deficit of $116,000.¹⁸

The failure of NBC was hardly an isolated incident. Between September 1873 and 1878, ten national banks and thirteen state banks closed in Chicago alone.¹⁹ Like other banks, NBC made risky investments, in this case bonds purchased at a discount from a failing bank in Steubenville, Ohio. The directors’ lax attitude toward their fiduciary responsibilities did not help matters. They rarely met and the small institution floated without direction, overshadowed by and ultimately unable to compete with better capitalized, more professionally operated national banks in the city. Farwell's early audits had lulled investors into a false sense of security. Watson's reports came as a bolt out of the blue, sounding a warning the bank president could not ignore. The culture of the banking sector was shifting away from the insider-lending model, in which capital tended to flow toward directors like Albert and their allies. Instead, and in a search for financial stability, a more impersonal system developed. Directors no longer benefitted directly from their own banks, and government regulations established a stable structure conducive to growth and attractive to outside investors.²⁰

Watson was not perfect, however, and had a blind spot where one East Coast banker was concerned. He was hoodwinked by W. F. Endicott, Boston-born president of CNB, whom Watson described as a “clearheaded, cultured business man” even as Endicott was siphoning money out of the bank and plotting his escape to Europe.²¹ Failing after years of poor management, CNB closed its doors in the winter of 1877 and Endicott fled to France with $150,000, having sold his partly paid shares at face value.²² Endicott was eventually captured and, in 1882, returned to stand trial, but by then the bank had evaporated and its depositors lost almost everything.²³ For his part, Albert assuredly lost money on the NBC closure, though the full extent of the damage to his finances is unknown. In his favor were federal regulations requiring directors to pay the full value of their shares upfront, and he owned very few of those. In addition, Albert appears not to have been involved with CNB at all, and for once he was not liable for any unpaid balances.

NBC was one of many investments Albert juggled in the 1870s. In May 1870, he, Ebenezer Jennings, his partner in the laundry business, and railroad ticket agent Cyrus Pratt created the American Homestead Company (AHC). The idea seems to have originated with Pratt, who served as secretary to a group promoting settlement in Colorado.²⁴ Pratt temporarily dropped out of the Pullman circuit, retaining an interest in the similar but unconnected Colorado project while Albert kept half an eye on the land game.

When the Rocky Mountain plan failed to yield fruit, Pratt turned to Pullman and Jennings. The three men incorporated another AHC “for the promotion of organized emigration.”²⁵ Licensed by the state of Illinois in 1874, Albert had himself elected president while Pratt became manager with Jennings appointed treasurer. Pratt and Jennings were connected through the clothing industry and the office of the revitalized AHC was located in Pratt's haberdashery on Clark Street. At its 1875 annual meeting, AHC claimed to own “a valuable tract of land in Dickinson County, Kansas, on which they have the nucleus of a colony formed, with post-office established (named Carlton), school-house, store, &c., and about fifty farms located.”²⁶ Two years later, the company advertised “fifty thousand acres choice land for sale in Central Kansas” and promised “Homes for the People.”²⁷ This was the last public appearance of AHC, which had allowed Albert to jump on and almost as quickly off the Kansas bandwagon.

For the brief duration of its existence, AHC claimed to be capitalized at $50,000, but it was a swindle.²⁸ There were neither homes nor farms available for sale because AHC did not own any land in Dickinson County. A small, aspirational settlement did exist there, along with a post office established in the area in 1872, but there is no evidence that Albert's company had anything to do with the hamlet of Carlton, named for a local farmer. Carlton itself was not platted until 1886, and county archives hold no titles connecting the area with AHC.²⁹ Records of the fraudulent firm have disappeared, if they ever existed, and AHC proved to be one of many schemes built on the hopes of others courted by promises and betrayed by deceit.

Despite the evaporation of AHC, the lure of land sales was too much for Cyrus Pratt. In 1878, just a year after AHC vanished, he organized the Soldiers Colonization Society. Originally formed in Milwaukee, the Chicago branch of the Soldiers Colonization Society hosted public meetings in the West End Opera House, conveniently close to Pratt's residence.³⁰ Taking advantage of an 1872 federal law designed to reward honorably discharged Union veterans with 160-acre homesteads, Pratt, “well-known as a colony organizer,” collected signed documents giving him power of attorney on behalf of the veterans in attendance. With these documents, he could claim land on their behalf from the federal government.³¹ To sweeten the deal, the act allowed veterans to deduct the total length of their service from the five-year minimum occupancy requirement before attaining full title.³²

Fundraising played a key role in the activities of the society. Concerts staged to raise money for exploratory trips to Kansas included an appearance by Colonel A. N. Waterman, formerly secretary of the Great Western Insurance Company (GWIC).³³ Two months after that first meeting, Pratt, by then manager of the proposed colony, addressed the organization with a map showing its location. Sitting on the border of Trego and Gove counties, about 150 miles west of Dickinson County, the new settlement was to be called Collyer, in honor of the Reverend Robert Collyer, president of the organization. Reprising his rhetoric from the 1870 Kansas excursion, Pratt praised the region for its fertility, rolling pastures, stones yearning to be quarried, and temperate climate awaiting settlers. One committee member sent to scout the land remained in Kansas to oversee construction of a “colony house” and two members of the society announced their intention to leave immediately for the new town and take up farming, but this was the last recorded instance of Pratt's work with the organization.³⁴

Unlike Pratt, Albert did not reenter the land-sales business because the Pullman Company continued to absorb his energies by diversifying its product range. In 1874, it introduced parlor cars for first-class daytime runs. These splendid cars provided ample room and amenities, with reclining and revolving armchairs and the ambience of a gentlemen's club. Next came a design for quotidian chair cars with lightly padded seats that reclined for overnight trips. Albert and George both participated in the first excursion to demonstrate the new equipment. Traveling on the Michigan Central from Central Station to South Chicago and back, Albert showed journalists how to work the seats. Styling himself vice president and master of construction, he explained that innovations built into this new type of car marked a departure in affordable railroad travel. Scheduled to operate between Chicago and Detroit, he convinced at least one reporter that the chairs were “as comfortable as a sleeping-berth.” The excursionists, after satisfying themselves of the utility of the new chairs, indulged in champagne, cigars, and card playing.³⁵ They did not, in all likelihood, receive the notices warning paying passengers that “it is dangerous to play cards with strangers.”³⁶

New Pullman designs proved a temporary distraction from Albert's ongoing financial difficulties. As if the disappearance of NBC and the collapse of his land scheme were not enough of a blow, the Great Western Insurance case simultaneously reached its climax. Clark Upton, the receiver, was enjoying steady progress identifying and suing GWIC shareholders. He had, for example, settled an $11,714 suit with Seth A. Matteson for $10,000 in cash and spent the next few months untangling a series of cases involving the sale and reassignment of mortgages and shares.³⁷ By May 1874, GWIC had accumulated so much land in its portfolio that Chicago real-estate dealers asked Upton to auction property located outside the business district on canal terms, which meant buyers paid 25 percent down with the balance secured by a loan or bond payable at 6 percent interest for up to three years. The bankruptcy judge agreed in principle but ordered the sale to be one-third cash with the remainder secured by one- or two-year mortgages.³⁸ The company needed money sooner than later to meet the demands of policyholders, and the sale would resupply its diminished coffers. More than five hundred lots were auctioned at its highly publicized “Great Bankrupt Sale,” realizing over $20,000 in cash and more in mortgages, a sizable increase on the $1,186 recovered during the previous month.³⁹

Policyholders remained dissatisfied, however. They stewed over court-approved dividend payments to shareholders and complained about what they saw as collusion among the directors. Creditors continuously criticized Upton, the assignee, and asked the judge to replace him because their claims remained unpaid; they filed suit to unseat him on the grounds that he had conspired with directors to defraud them.⁴⁰ The complaint argued that Albert and the other directors had secretly settled each other's accounts between the fire and the declaration of bankruptcy, saving themselves but rendering the firm incapable of meeting claims. The insurance company's president, Hart L. Stewart, again came under attack. Creditors asserted that he had converted his ownership in “swamp lands” into mortgages, which he then sold to GWIC and continued to evade liability for unpaid share balances and loans from the firm. The creditors publicly charged the directors with employing fraudulent tactics to avoid paying the full amount of their share subscriptions.⁴¹ Albert was found guilty on this score in district court and ordered to pay $2,234 to the insurance company, a ruling he appealed all the way to the US Supreme Court.⁴²

The attempt to depose Upton failed, and the assignee continued to pursue shareholders, including directors, through the courts. They fought back with a variety of ingenious arguments about why they should not be held liable for unpaid share balances. Each GWIC case offered a different perspective on the issue of shareholder liability, but the effect of the whole was to uphold a nineteenth-century interpretation of shareholding called the trust fund doctrine. Economists and jurists argued at the time that stocks should not be traded and must not be subject to speculation. The price of a share, in this reading of economic activity, was eternally fixed. Par was par, and that was that. Rarely honored in the marketplace and soon to be invalidated, the trust fund doctrine held that shareholders were stewards, or trustees, holding shares that existed to repay creditors in the event of bankruptcy. In theory, it followed, shareholders were liable in perpetuity for the full value of their shares. Needless to say, Wall Street brokers ignored this doctrine and, from 1887 on, court cases increasingly negated it.⁴³

GWIC litigation wound its way through the court system until, beginning in October 1875, several cases came before the US Supreme Court. The first of these, Upton v Tribilcock, was a resounding victory for the assignee and set the tone for the remainder. Back in September 1874, Upton had sued J. D. Tribilcock, a Bloomfield, Iowa, shareholder who refused to pay the outstanding balance on his shares.⁴⁴ Tribilcock claimed the GWIC agent from whom he had purchased one hundred shares promised he would never be called on to pay the full amount of his holdings because his dividends would pay the balance, a common line of argument in pitching share sales. Tribilcock had purchased $10,000 worth of shares, paying the standard $2,000 and becoming a director of the company. When Upton demanded payment of the balance, Tribilcock repeated the agent's statement and refused to comply.⁴⁵

Tribilcock lost at the state level and again in the Supreme Court. The case reinforced the legal standing of the trust fund doctrine. Associate Justice Ward Hunt argued that “the idea that the capital of a corporation is a football to be thrown into the market for the purposes of speculation, that its value may be elevated or depressed to advance the interests of its managers, is a modern and wicked invention.” Like many of his fellow jurists, Hunt viewed capital as a fund set aside to pay corporate debts and the directors as having a “sacred duty” to meet those debts. More pertinent to the case at hand, he cited the principle of caveat emptor, warning that allowing buyers to renege on signed contracts out of ignorance of their contents would destroy the economic system. Tribilcock “failed to use due diligence to ascertain the truth or falsity” of the agent's statement.⁴⁶ Hunt sent Tribilcock back to Iowa for retrial, and the press reported it as a precedent-setting case.⁴⁷

Precedent setting it proved to be. Subsequent rulings reinforced and refined Tribilcock. In the case of Sanger v Upton, a shareholder sued the assignee on the grounds that, having missed the hearing authorizing Upton to collect subscriptions, she was under no obligation to pay. The shareholder, Mary C. Sanger, was James Y. Sanger's widow and George Pullman's mother-in-law. Her counsel argued that being absent from the hearing relieved her of responsibility for the payment. The court found against her on the grounds that the company made reasonable efforts to inform shareholders by mail and through newspaper announcements, and Sanger could therefore “hardly be ignorant of the measures taken to reach” her.⁴⁸ Another shareholder, Daniel Webster, claimed exemption from paying the outstanding amount on the grounds that he had purchased shares from another shareholder without explicitly promising to pay the balance. The court, in Webster v Upton (October 1875), rejected Webster's argument on the grounds that he had assumed an implied promise to do so when the company transferred the shares to his name.⁴⁹

The case of Pullman v Upton reached the Supreme Court in April 1878. It rested on Albert's challenge to a lower court ruling that all stock certificates had to be paid in full to the receiver. The shares in question were those his business partner, David Myers, gave Albert as collateral on a loan but toward which Myers had paid only the customary one-fifth. Appearing on Albert's behalf, Pullman Company lawyer H. S. Monroe offered two lines of reasoning to argue that Albert should not be liable for the unpaid balance. First, Monroe asked the court to reject documents used in the lower court, including the notice Albert had received demanding payment, because GWIC no longer existed.⁵⁰ The court rebuffed this argument on the grounds that the documents proved the company had once been active and that was sufficient to require payment. The second part of Albert's defense rested on the notion of non assumpsit. Monroe argued that his client had made no promise, either express or implied, to pay the full value of the shares Myers had transferred to him. Albert claimed to have had no knowledge of the unpaid balance because the share certificates were marked nonassessable, and nothing indicated they had not been paid in full.⁵¹

Justice William Strong disagreed with Monroe's reasoning. Writing for the majority, his opinion held that Albert had indeed become responsible for the outstanding balance, even if he had no prior knowledge of it when he assumed ownership of the shares. Albert would have been responsible even if he had not transferred the shares to his name on the books of the company, as he had done two days before the Chicago fire.⁵² Albert lost the case and was required to pay the outstanding amount along with interest and court costs, around $5,000 in total. The GWIC cases reaffirmed the responsibility of shareholders to pay the full value of their shares when creditors required them to do so, whether or not the shareholders knew of their obligation.⁵³ For Albert, the opinion ended his interest in insurance investments.

Following his enforced departure from the banking industry, the collapse of AHC, and his Supreme Court defeat in the fire insurance case, Albert took a break from investing. His time as a director of NBC and GWIC showed he could be perennially and dramatically irresponsible, someone for whom shares were no more than instruments for profit. That he might have taken a role in running the company seems not to have occurred to him. Albert may have sought to emulate George, but he did not copy his younger brother's dedication to the basics of investing and the duty of being actively involved in the companies in which he purchased an interest.

As he did for other family members, George paid Albert's debt and may even have told his brother to lay low for a while. Albert had been playing by the rules, as far as George knew, and the insurance company loses resulted from sheer bad luck. Precisely how much George understood about the land scheme is uncertain, but no doubt Albert cleared himself of wrongdoing in George's mind. Besides, Albert had been proving his worth to the Pullman Company by coordinating the production and trial runs of Pullman cars in England and France. This was another plank in the Pullman expansion platform, and Albert was central to it.