Big Tech's AI boom echoes the 1870s railroad expansion, and Nvidia shifting risk to institutional capital may expose investors if revenues fail to materialize (Ben Thompson/Stratechery)

In January 1870, Jay Cooke, an American hero for financing the Union during the Civil War, signed a contract that would later lead to a global conflict. Congress had established the Northern Pacific Railway Company in 1864, aiming to connect the Great Lakes and Puget Sound with tracks stretching from Duluth to Tacoma. The charter granted the company 40 million acres of land adjacent to the proposed line in exchange for completing the construction.

For six years, Northern Pacific struggled to secure funding, despite the Union Pacific and Central Pacific railroads making progress. Jay Cooke, familiar with federal financial power, initially declined to fund Northern Pacific. However, he ultimately accepted an offer that included a 12% commission on every bond and $200 worth of Northern Pacific stock for every $1,000 in bonds sold.

Cooke then enlisted 1,500 salespeople and funded 1,300 newspapers, capitalizing on patriotism and promises of fortune, much like his wartime bond sales. His innovative approach of using retail investors as the primary funding mechanism proved successful initially. However, by September 1873, as worldwide credit tightened due to a crash on the Vienna stock exchange and the demonetization of silver, Cooke could find no more buyers.

This led to Northern Pacific's bankruptcy, triggering the Panic of 1873 and contributing to a multi-year depression, deflation, and financial instability that ultimately shaped the geopolitical landscape. Northern Pacific did eventually complete their railroad line, merging with other railroads to form the Burlington Northern Railroad, which later merged with the Atchison, Topeka and Santa Fe Railway to create BNSF Railway.

Berkshire Hathaway would purchase the parent corporation in 2009. The parallels between this historical event and the current AI boom are being drawn by Liaquat Ahamed, whose book "1873" is frequently cited for its insights on the connection.