Review of William Tecumseh Sherman: Gold Rush Banker by D. E Clarke

Having just finished reviewing The Gold Rush Letters of E. Allen Grosh and Hosea B. Grosh (here and here), I wanted to read a firsthand account of banking in gold rush California.

I found a used copy of William Tecumseh Sherman: Gold Rush Banker, published in 1969 and now obviously long out of print. The sources for the book are fantastic: the letters between Sherman and his partners in St. Louis regarding the conduct of the San Francisco business.

Yes, it's that William T Sherman, the Civil War general, who was a banker in San Francisco during the gold rush. In 1848 he was the adjutant to Colonel Mason, the military governor of California, and so was one of the first people in the world to learn that gold had been discovered at Sutter's fort. Despite learning one of the most valuable freely exploitable bits of information of all time, he remained in the military until 1853 when a St. Louis bank hired him to open and run a branch in San Francisco.

He was obviously chosen for his political connections and extensive knowledge of California gained in the military, though he never reflects on this in the letters. Sherman established the San Francisco branch of Lucas, Turner & Co. in 1853 and moved into a purpose-built building on the northeast corner of Jackson and Montgomery Streets in the spring of 1854, which still stands today, a block from the Transamerica Pyramid building.

This book has much more of what I was originally interested in: data on prices, yields, and business conditions in the boomtown. Sherman was hired at a salary of $5,000 a year - about $15 a day, which is what the Grosh brothers said that a carpenter made. I suppose that parity between banking and skilled construction wages makes sense. Sherman's bank paid a bookkeeper $250 ($3000 a year, less income variability back then) and Sherman thought this fellow could "live well" for $100/mo, supporting my theory that it used to be easier to free yourself from working by saving money.

The Grosh account of interest rates is correct, too. They were three percent a month! At one point, the average gross interest on Sherman's branch portfolio of loans is 28 percent annual. That would have been great news for someone like Sherman's bookkeeper, who could have doubled his net worth every two to three years by making small loans.

What's important for a bank is not the prevailing gross interest rate but the spread that the bank is able to earn between loans and funding sources, minus expenses and defaults. Gold rush banks appear to have borrowed at 1-2%/mo and lent at 3%/mo for a spread of 1-2%. Sherman's bank paid a dividend of $50,000 for 1854 when it had about half a million in loans.

The other big business besides lending was money transfers from California to the east coast. The going rate was a three percent fee, which left Sherman's bank with about one percent profit, although the market fee tightened faster than his expenses did, and in later years he complained constantly that his bank couldn't make money on these transfers.

The banks in San Francisco (and even banks "back home" in St. Louis and New York) were getting in constant jams because of fractional reserve banking. One thing I hadn't realized is that San Francisco business conditions were levered to the amount of gold coming in from the mines, and the amount of gold mined was, in the short run, a function of rainfall. (Water being used to separate the gold from dirt.) In the long run, of course, the gold production decayed steadily as the most easily discovered and extracted deposits were mined. The "Hubbert's Peak" for California gold was in 1852, before Sherman's bank was even set up.

There's a great story of a competing bank, Palmer and Cook, founded by two men who had sailed from Nantucket with a ship full of lumber right as the gold rush began, which was a brilliant trade that gave them ample capital for banking.

And of course, Wells, Fargo & Company was there too. Henry Wells and William Fargo (for whom Fargo, ND is named) had founded American Express in 1850 and created Wells Fargo in 1852 to provide express and banking services in California.

Sherman's bank had difficulty competing against the best San Francisco banks (the worst ones failed during panics). It's not clear why from the letters, although it looks like perhaps the competitors were better capitalized.We forget, but before deposit insurance a bank borrowed more cheaply and was less vulnerable to runs if it was less levered. One thing I don't understand is why no one set up a "fund" rather than a bank to make loans at three percent using capital from eastern investors. Perhaps that type of abstract thinking hadn't caught on yet, as mutual funds didn't exist in the U.S. until the very end of the 19th century.

You always hear that ships' crews deserted and that San Francisco harbor filled with abandoned ships. That may have been true during the first couple years, but later there was quite a traffic of people back and forth from California. Sherman's partners came from St Louis to visit, his wife went back and forth from Pennsylvania, investors from the east coast came to look at property. We also know from both Sherman and the Grosh accounts that many people got frustrated or tired with California and left. For some reason, Sherman thought that the air in San Francisco was unhealthy.

He was competent and quite conservative as a banker, but never had a particularly insightful thought about banking, mining, San Francisco, or California. He thought that the Gadsden purchase was a waste of money and never wrote anything favorable about the San Francisco harbor. It makes sense that he never went on to any distinction in business, although you would not have guessed that he would become a war criminal.

Rating: 3/5, useful source.