[Global Finance History] The Jewish Banker Schiff Who Became a Legend in the US Railroad Industry

Succeeded as a Banker After Moving to the US
Innovated Finance to Complete Railroads
Founded a Holding Company Competing with Morgan
Built a Vast Railroad Network

Jacob Schiff, who was a leading figure on Wall Street alongside JP Morgan, operated the second-largest investment firm in the industry. While JP Morgan invested in various sectors, Schiff focused on railroads. In the early 20th century, he reorganized multiple transcontinental routes and sold all railroad bonds. Schiff entered the financial industry following his father, who was an intermediary for the German Rothschild family. He emigrated to the rapidly growing United States and eventually succeeded as a banker, continuing the family business. At that time, the United States, lacking sufficient capital, had no choice but to rely on European financial capital intermediated by immigrants like Schiff. Unlike Morgan, Schiff, who was Jewish, represented the Jewish financial world on Wall Street. Moreover, thanks to his connections with the Rothschild family, he had a brilliant network with European banks. To attract European capital, he formed alliances with European bankers. By concentrating investments in railroads, Schiff was able to secure funding without much difficulty.

Before selling bonds, Schiff personally learned about the railroad business. He obtained seats on boards of directors or served as an advisor to executives overseeing financial matters. He traveled railroad routes, studied equipment, and predicted market competition. To ensure all investments were properly managed, he applied the same tactics to every investment he pursued. Because Schiff carefully managed his clients’ investments, he was able to secure many clients. European investors preferred American investments, which promised higher returns than European ventures.

As a result, Schiff was able to finance the expansion, improvement, and operating costs of American companies, especially railroad construction. He always maintained strong familial ties with Germany. Furthermore, he kept close relationships with banks based in London or Hamburg, as well as with the Hanseatic League.

In 1871, Germany was unified as a single nation under Chancellor Bismarck. Schiff lived among German immigrants in New York City, maintaining his ties with Germany. To fund American railroads, he formed alliances with European banks. By 1904, the scale of railroad investments exceeded the combined total of all other commercial investment forms in the United States.

Schiff innovated finance from a transnational perspective to complete the railroads. Although he once clashed with Morgan over control of the Northern Railroad, Schiff and Morgan compromised by creating a jointly managed holding company. Since then, JP Morgan recognized Schiff as his sole rival. With the completion of railroad infrastructure, the United States transformed into the world’s leading industrial economy. Among America’s growth industries, railroads were undoubtedly the frontrunner.

From the late 1860s to the 1890s, demand for steel, coal, railroads, civil engineering, and labor drove the American economic engine. Schiff leveraged his experience from networks in Frankfurt and Hamburg. He utilized existing contacts for banking business and diligently developed and expanded his network. He was introduced to a Mexican businessman and established a Mexican bank. Through that connection, he jointly marketed bonds for the Pennsylvania Railroad in 1906.

The Erie Canal project in the 19th century transformed New York City into a financial and trade hub. At that time, western expansion, industrialization, and mining promised railroad profits. After the Civil War ended, pent-up demand surged explosively. Railroads required substantial funds to lay tracks and purchase equipment. Issuing bonds was one way to meet financial needs. Europeans seeking high investment returns looked to the rapidly developing United States, choosing the emerging economy. Transcontinental railroad companies promised to connect the Atlantic and Pacific Oceans. However, the West had a sparse population, and it was uncertain whether trade and passengers would make railroads profitable, thus involving enormous risks.

Fierce competition surrounded railroad businesses everywhere. Their managers were not always financially prudent. To secure capital in a timely manner, railroad companies relied on insurance to transfer market risks of debt. When debt issuance was difficult, they had to purchase securities themselves and bear future risks. Managing all those risks and creating a vast railroad network was entirely Schiff’s achievement. Schiff’s company, Kuhn, Loeb & Co., juggled these market uncertainties. Sometimes the company willingly raised debt issues. Other times, it bought them and had to sell later at low prices when opportunities arose, incurring losses. In some cases, it issued debt certificates on its own.

In other cases, the company joined other banks in syndicates to propose debt issuance and share profits and risks. These activities required the company to maintain adequate cash liquidity to meet client demands. When Schiff entered this field, syndicates were a relatively new method of selling debt products. Because Schiff entrusted North Pacific Railroad securities to a German investor syndicate in 1870, German syndicates were ahead of American ones. The first American underwriting syndicate was in 1871.

Another aspect of Schiff was as a ‘Japanese banker.’ Early in the Russo-Japanese War, Schiff met Takahashi Korekiyo, the deputy governor of the Bank of Japan. Later, through his company Kuhn, Loeb & Co., he syndicated loans up to $200 million to Japan for war expenses. This was a miraculous event after being rejected by nearly all banks. Thanks to wartime financing, Schiff became the first foreign private citizen to dine at the Japanese Imperial Palace. Throughout his life, he managed loans to numerous governments and corporations. As a philanthropist, he continued the German-Jewish tradition of public welfare. Through donations to American citizens and educational institutions serving all races and religions, he proved his loyalty as a citizen. However, like JP Morgan, Schiff still found it difficult to gain public recognition during the Progressive Era, when Wall Street bankers and railroads faced public anger. He persuaded his family to continue charitable activities at least into the next generation but could not pass on his leadership or commitment to the community.

Baek Youngran, Representative of History Journal

This content was produced with the assistance of AI translation services.