This is the story of the financing behind what at separate points in time was once the world’s largest IPO and the largest real estate deal ever. Even more, this is the story about an undertaking which actually changed the course of world history. This is also the story of French capitalism and American socialism. Let me explain, drawing heavily from The Path Between the Seas, an excellent book, one I highly recommended, by David McCullough on the construction of the Panama Canal for the relevant history.
On November 17, 1869, the Suez Canal opened to remarkable fanfare. The event instantly made Ferdinand de Lesseps an international hero. de Lesseps’ work wasn’t done with this one accomplishment. To that end, he used his position of fame in order to attempt to conquer an even bigger task: building a canal to connect the Atlantic Ocean and Pacific Ocean in Central America.
The Suez Canal had been built with private money and existed as a publicly held corporation (public as in freely liquid ownership amongst private citizens, not government ownership). de Lesseps saw the Central American project similarly, and felt its financing via private money was an important and “American” way to pursue the undertaking. Private financing was a strategic move, for at the time, the U.S. government still took the Monroe Doctrine declaring the Western Hemisphere the American domain very seriously. It was also a sentimental move which de Lesseps spoke about tying the importance of private capital with the notion that it would merely facilitate him as “but an executor of the American idea.” (McCullough, David (2001-10-27). The Path Between the Seas: The Creation of the Panama Canal, 1870-1914 (Kindle Locations 1754-1757). Touchstone. Kindle Edition.)
This made sense on several levels. The U.S. stood to benefit substantially from the completion of a “path between the seas,” as the book bearing that title explains:
A Wall Street man named Frederick Kelley calculated that a canal through Central America could mean an annual saving to American trade as a whole of no less than $ 36,000,000— in reduced insurance , interest on cargoes, wear and tear on ships, wages, provisions, crews—and a total saving of all maritime nations of $ 48,000,000. This alone, he asserted, would be enough, irrespective of tolls, to pay for the entire canal in a few years, even if it were to cost as much as $ 100,000,000, a possibility almost no one foresaw. (Ibid, Kindle Locations 457-460)
Americans had plenty of experience with private capital invested in Panama. At one point, the Panama Railroad was the highest priced stock on the New York Stock Exchange, and its shares paid an average 15% dividend over its publicly traded period (here’s a fun list of “amazing facts” on the Panama Railroad). When de Lessing commenced the Panama Canal project, it was to be the single largest financing in the history of the world, up to that point. Much was on the line alongside the money, including de Lessing’s legacy as a man who could build the impossible, and French pride as a global engineering powerhouse. Further, this was about capitalism and democracy, two ideas rapidly changing the world at that time, and the “limitless expectations associated with venture capitalism—pionnier capitalisme. The talk was of ‘the poetry of capitalism’ and of ‘the shareholders’ democracy.’”
As history would have it, the French, capitalist version of the Panama Canal wasn’t meant to be. For the French, the financial losses were drastic, as was society’s backlash. This is embodied in the aftermath of the Panama Canal Company’s failure, which today in France is known as “L’Affaire Panama.” Over 100 French legislators were accused of corruption and several governments collapsed. In the aftermath, anti-Semitism spiked sharply due to various conspiracy theories, ultimately climaxing in another French affair, “L’Affaire Dreyfus.”
Amidst the chaos in France, a successor to the Panama Canal Company was established in order to dispose of the company’s remaining assets, including its equipment, land rights, railroad ownership and digging completed to-date. The U.S. government emerged as the best, most logical buyer, eventually completing a deal with historic implications:
The purchase of the French holdings at Panama was the largest real-estate transaction in history until then. The Treasury warrant for $ 40,000,000 made out to “J. Pierpont Morgan & Company, New York City, Special Dispensing Agent,” was the largest yet issued by the government of the United States, the largest previous warrant having been for the $ 7,200,000 paid to Russia for Alaska in 1867. Participation by the house of Morgan had been agreed to by both the buyer and the seller and in late April, prior to receipt of the Treasury warrant, J. P. Morgan sailed for France to oversee the transaction personally. His bank shipped $ 18,000,000 in gold bullion to Paris, bought exchange on Paris for the balance, and paid the full sum into the Banque de France for the account of the Compagnie Nouvelle and the liquidator of the Compagnie Universelle. On May 2, at the offices of the Compagnie Nouvelle on the narrow, little Rue Louis-le-Grand, the deeds and bills of the sale were executed. On May 9 in New York the United States repaid the $ 40,000,000 to the house of Morgan. Morgan’s fee for services, charged to the Compagnie Nouvelle, was $ 35,000. With the $ 10,000,000 paid to Panama and the $ 40,000,000 to the Compagnie Nouvelle, the United States had spent more for the rights, privileges, and properties that went with the Canal Zone— an area roughly a third the size of Long Island— than for any actual territorial acquisition in its history, more than for the Louisiana Territory ($ 15,000,000), Alaska ($ 7,200,000), and the Philippines ($ 20,000,000) combined.” (Ibid, Kindle Locations 6847-6851)
Since this is the story of the financing of the construction of the canal, we’ll willfully ignore some of the “diplomacy” and its associated costs. The U.S. commenced construction in 1904 with the government overseeing a team of private contractors. One such contractor that emerged as an important American industrial power was Bucyrus Corporation (now part of Caterpillar). Bucyrus’ steam-shovels became the standard during the construction of the Canal and they did their job magnificently. A second contractor with massive success was the General Electric Company:
For the still young, still comparatively small General Electric Company the successful performance of all such apparatus, indeed the perfect efficiency of the entire electrical system, was of the utmost importance. This was not merely a very large government contract, the company’s first large government contract, but one that would attract worldwide attention. It was a chance like none other to display the virtues of electric power, to bring to bear the creative resources of the electrical engineer. The canal, declared one technical journal, would be a “monument to the electrical art.” It had been less than a year since the first factory in the United States had been electrified” (Ibid, Kindle Locations 10237-10242)
Unfortunately, the vast majority contractors the government hired couldn’t do their jobs all that efficiently. In