Nvidia's Risky Business

The story of Jay Cooke & Company's risky endeavors in financing the Northern Pacific Railway Company began in 1864, when Congress created the company with the aim of connecting the Great Lakes and Puget Sound via tracks extending from Duluth to Tacoma. The railway was to be built using 40 million acres of land adjacent to the proposed route, a significant concession by the federal government.

Northern Pacific struggled to secure financing for six years, despite the fact that Union Pacific and Central Pacific, two rival railroads, had already completed their projects, forming the first transcontinental line in May 1869. In 1866, Northern Pacific approached Jay Cooke for funding, but the railroad lacked the federal guarantees that had bolstered Union Pacific and Central Pacific.

Cooke, however, found himself unable to resist an offer he couldn't refuse: a 12 percent commission on every bond and $200 worth of Northern Pacific stock for every $1,000 in bonds he sold. Cooke's innovative approach to funding, which involved employing 1,500 salespeople and controlling media outlets, proved incredibly successful.

Retail investors could fund railway bonds, and Cooke used them as his primary mechanism for raising capital. Unfortunately, Northern Pacific's capital needs were vast, and by September 1873, Cooke found himself unable to find more buyers as worldwide credit tightened following a crash on the Vienna stock exchange and the demonetization of silver.

The subsequent bankruptcy of Jay Cooke & Company triggered the Panic of 1873, a chain reaction that resulted in countless railroad bankruptcies, a multi-year depression, and multi-decade deflation. Some argue that the financial conditions of the Panic of 1873 paved the way for Europe's tensions four decades later. The story of Cooke's risky business practices and the subsequent economic fallout has drawn comparisons to the present day, particularly in Liaquat Ahamed's new book, "1873."

Ahamed, who describes Cooke as a central figure in the book, draws parallels between the railroad buildout in the 1870s and the current AI moment, estimating that $600 billion is equivalent to the $500 million invested in U.S. railway bonds annually during the boom years of the early 1870s. This comparison has caught the attention of tech industry leaders, with Microsoft CEO Satya Nadella citing "1873" as a recommended read for his recent earnings call.

Microsoft, unlike other hyperscalers, still maintains substantial free cash flow, which has allowed it to avoid excessive debt.