Financial History Issue 131 (Fall 2019) - Page 26

the state had taxed dividends declared by banks and financial institutions at 5%, but raised the rate to 20% by March of 1836. Moreover, the state’s continued fis- cal woes prodded the legislature in 1851 to adopt a law stipulating that “the property of corporations…shall be subject to taxa- tion, the same as the property of private individuals.” Financial journalists opined that in the wake of such burdensome taxa- tion, Ohio Life might have to shut down its operations. Nevertheless, the company weathered the storm even as the regulatory bur- dens made Ohio Life’s business that much more difficult. For instance, citing the irregularity of dividend payments because of underperforming assets as an issue, the state finance committee suggested in 1852 that Ohio Life: (1) amend its charter for the creation of additional stock used for the purpose of bank capital and (2) submit five percent of its profits for income tax purposes. Such external shocks of taxes and regulations, coupled with internal mismanagement by the trustees, would push Ohio Life to its financial precipice; embezzlement would propel it into an economic abyss. In all fairness, Ludlow often acted upon the instruction of Ohio Life’s trustees. Recognizing that headquarters frequently ran into liquidity problems while the New York branches generally remained solvent, New York’s personnel were constantly pressured into funneling cash to Cincin- nati. Ludlow’s first experience with one of seemingly numerous cash short falls caused by headquarters occurred almost immediately after his promotion in 1855. At the time, $200,000 of a loan amount totaling $600,000, borrowed when Ohio Life commenced operations, came due on March 1; Ludlow, with funds drawn from New York, had to cover the cur- rent liability. Further still, the home office issued excessive drafts New York covered, and during the first four months of 1856, its debt obligations held by the New York offices exceeded the previous year’s aver- age. In May of 1856 it was estimated that Ohio Life had only $346,925.92 in call- able assets for immediate collection. This amounted to only 23% of the amount of their obligations subject to call. Another problem facing the company was the composition of its asset portfolio which, due to a significant number of rail- road debt instruments, exposed the firm $10 bank note proof from the Ohio Life Insurance & Trust Company. to considerable default risk. For example, by 1857, Ohio Life had already lent $5 mil- lion to railroad construction firms and held a substantial amount of railroad equi- ties. Not that the firm acted alone, how- ever, for, in keeping with the demand for railroad expansion, creditors lent millions to railroads during this era. As posited by historian Kenneth Stampp, railroads contributed greatly to the advancement of the domestic economy during the 1850s. Stampp cites the construction of track and consolidation within the industry as primary contributors to growth. By one estimate, 24,476 miles of track had been completed in July of 1857 with several thousand still under construction at the time. Westward migration, too, of both immigrants and those leaving the eastern seaboard would only further spur investment in this industry; railroad investment grew from $37 million in 1849 to $111 million by 1854. By 1854, however, earnings of many of the older western lines diminished because of the ferocity of competition among competitors looking to establish permanency out west. Newer railroads establishing themselves in the West provided speculative opportunities for investors. Hunt’s Merchant Magazine, a US com- mercial review periodical of the mid-19th century, remarked that same year how a borrowing frenzy had gripped railroad developers, but lenders would eventu- ally curb their enthusiasm. The Hunt’s commentator opined “…borrowers…are pressing their bonds upon the public”; yet the writer further noted those rail- roads not completed “will be obliged to 24    FINANCIAL HISTORY  |  Summer 2018  | postpone their operations to a period when the money market will be more compliant.” Still, a “railroad fever” would continue fascinating the nation, much of it attributable to the growing interest in Kansas settlements by those interested in expanding slavery or making it a free state. However, railroad failures would com- pound the economic crisis of 1857, pri- marily because of their excessive use of debt financing for westward expansion. By 1858, many of these lines, though still operational, found themselves either in bankruptcy or with their debt trading well below par on Wall Street. In a judgement by the US Circuit Court, Southern District of Ohio for the purpose of reimbursing Ohio Life’s creditors sub- sequent to its default on August 24, the court determined substantial amounts of money were loaned to both individuals and railroads lacking sufficient collateral. The court chastised Ohio Life’s trustees (and Ludlow) for also making railroad security purchases which declined in value during the Panic. In fact, Ludlow, in early 1857, acting to boost the value of railroad assets held by the New York offices, paid off a loan made by the Cleveland and Pittsburgh Railroad and failed to disclose the transaction in his report to the trustees. The Cleveland and Pittsburgh affair not only demonstrated Ludlow’s willingness to compromise his fiduciary responsibilities, but further conveyed a lack of sophistica- tion for risk assessment. The railroad’s stock dropped from $39.50 in July of 1857 to $20 per share that August. Its bonds tumbled from $93 in September to $50 by November of 1858. Of course, Ludlow (or the trustees)