Ode to America

A Personal History of American Finance

Happy Fourth of July weekend to all my American readers. This one’s free to read but to support independent writing, please do sign up as a paid subscriber. As well as gaining access to my archive of over 200 evergreen issues and unlocking paywalled content, you will also be able to listen to my new podcast, Net Interest Extra. My recent interview with Ted Seides about the asset management industry was a big hit and coming soon – an interview with Davide Serra, founder of Algebris Investments, where we discuss Europe and its investment landscape. For now, though: My Ode to America – click here to view it online.

• There’s a story I grew up with, though on reflection I think it may be apocryphal. I was raised in Liverpool, once a thriving port known as the “second city” of the British Empire. My great-great-grandparents arrived from Eastern Europe at the end of the nineteenth century in search of a new life. The story goes that like millions of others, their destination had been New York but an unscrupulous ship captain put them off prematurely at Liverpool rather than Ellis Island. Whether it’s true, or whether they simply ran out of money for the Atlantic crossing, is lost to history but Liverpool became home, leaving me with an inherited sense of what might have been.¹

• When they docked, my forebears might have struggled to spot the difference. With 40% of global trade passing through its port, the Liverpool Times had good reason to brand the city the New York of Europe. “New York is the only place out of Great Britain which can at all compare with the extent of its commerce,” the paper declared. Unbeknown to them (they were musicians and cabinetmakers), both cities were also crucibles of financial ingenuity, their busy ports driving the development of sophisticated trading and clearing systems. The Cotton Market Clearing House, established a few years before their arrival, would prove a pivotal innovation in modern financial infrastructure.

• From the start of the twentieth century, the cities’ fortunes began to diverge. Liverpool’s over-dependence on trade rather than production exposed it to economic decline when Britain lost its dominance of world markets in the 1920s and global commerce then slumped during the Depression. Between 1919 and 1939, Liverpool lost 1% of its trade each year to other British ports, particularly London where handling costs were cheaper and imports found a larger market. Unlike New York, Liverpool didn’t sufficiently diversify. The rise of containerization in the 1960s accelerated the decline, and Britain’s entry into the European Economic Community sealed it by shifting the locus of trade south-east.²

• Some of my family did make it to America. My great-grandfather’s brother emigrated in 1924, sailing on the SS Mauretania from Southampton to New York. It must have been an emotional journey for him. As music director for the White Star steamship line, his job had been to engage musicians to entertain passengers on ocean liners. When the Titanic was preparing for her maiden voyage in 1912, he appointed himself as bandmaster. At the last moment, his wife took ill and he stayed behind, assigning Wallace Hartley in his place. As he crossed those same waters twelve years later, he must have wondered whether he too would have chosen to play until the end.³

• I myself first set foot in Manhattan at the age of 20 and I was awed. I’d seen the movies (Wall Street, Working Girl) and read the books (Barbarians at the Gate, Bonfire of the Vanities) but nothing prepared me for how money seemed visibly to course through its streets. Several years later, as a stock analyst, it would sometimes feel like a second home. In London, being an equity analyst meant explaining your job at every dinner party. In New York, we were gods.

• The history of American finance is rooted in the history of railroads. When the first inter-city railway in the world was laid from (where else) my hometown of Liverpool, it was financed via a private placing: local merchants and mill owners subscribed to 4,000 shares at £100 each. America took the idea and made it bigger. Compared with the $188 million invested in canals from 1815 to 1860, three quarters of which was supplied by state and local governments, the total amount of money spent on US railroads was more than $1.1 billion. It was impossible to raise this amount of capital by tapping the traditional resources of friends and family, so the New York Stock Exchange became a hub. Before the railroad age, a busy week on the exchange might have involved a thousand shares; by 1860, million-share weeks were not uncommon. Railroads still accounted for 60% of publicly issued stock in 1898 and 40% in 1914. Today, they account for around 0.5% of the S&P 500 index but the industries they spawned – finance and retail among them – account for much more.⁴

• A recurring theme of American capitalism is its capacity for renewal. In 1857, a financial crisis devastated demand for railroad stocks and left investors nursing severe losses. But the experience didn’t deter markets from backing new ventures. The New York Stock Exchange went on to fund wave after wave of innovation – from automobiles to electricity distribution, from aviation to radio. Contrast that with the UK where a flurry of investment in the electricity and electric lighting industry went sour. When the Brush Electric Light Company went public in 1882, “there was such a rush for the shares as had never been seen before,” but disappointment followed. The episode left deep scars on the British financial psyche, making London wary of financing new industries – “above all electrical engineering, chemicals and in due course motor cars” – just as America and Germany were establishing their technological leadership.

• Podcast host Chris Williamson recently observed that Britain venerates its cynics while the US venerates its bullshit artists. It’s a good framing of the nations’ divergent attitudes toward ambition and possibility. British cynicism acts as a gravitational force, pulling new ventures back to earth. American optimism propels them skyward, even if it sometimes fuels excess speculation. “Startup founders in the US imagine the range of possible scenarios and pitch the top one percent outcome,” says Monzo co-founder Tom Blomfield, now a group partner at Y Combinator. “On the contrary, many UK investors take an extremely risk-averse view … The approach to business in the UK and Europe feels zero-sum.”⁵

• Railroads didn’t just revolutionize the stock market, they forged modern financial practices. Traders developed new techniques like short-selling and margin trading, while banks invented new forms of lending to support speculation. The industry spawned a new financial media ecosystem including the Wall Street Journal and even gave birth to the ratings industry through Henry Varnum Poor’s American Railroad Journal. As well as being the center for railroad equity, Wall Street became the center for its debt – by 1913, railroad bonds totaled $11.2 billion versus $7.2 billion of common stock. This reliance on public markets partly reflected America’s fragmented banking system; unlike Europe’s universal banks, US banks were restricted from operating across state lines, pushing national companies toward capital markets for financing.

• British retailer Marks and Spencer paid me a small dividend this week. I inherited a modest shareholding from my grandmother whose father subscribed to the company’s initial public offering in 1926. He was unusual. Unlike in the US, there had been no major effort to promote shareholder democratization in the UK, and shareholder numbers remained low. In contrast, the number of individual shareholders in the US increased steadily. Today, around 21% of American households own stocks (33% including funds) compared with 14% in the UK (16% with funds). I sometimes wonder if gambling legislation has something to do with the gap. In the UK, speculative excess has historically played out at the racecourse and in smoke-filled betting shops; with these avenues cut off in the US, the main outlet became the stock market. But it might also reflect America’s greater capacity for renewal. US household stock ownership has now regained all ground lost since the dot-com crash of 2000. In the UK, we remain well below our 2000 peak, still nursing old wounds.

• As an outsider, I’ve always been fascinated (and admittedly envious) of that most iconic of American products: the 30-year fixed rate mortgage. Its economics are so distorted that an entire government-sponsored apparatus exists just to make it work. “You Americans are so strange,” a former Governor of the Bank of England once remarked. “Most countries have socialised healthcare and a private market in mortgages. You have socialised mortgages and a private market in healthcare.” Introduced in the 1930s to lower home loan costs, the product serves a broader purpose of allowing shelter to be converted into liquid wealth. Every drop in rates triggers a refinancing wave that lets homeowners reset payments and extract equity. During the pandemic alone, five million borrowers pulled out $430 billion this way, turning paper gains into hard cash. Today, US households sit on $35 trillion of home equity that becomes accessible whenever rates fall.⁶

• It’s a common misconception that the US runs with smaller government than other advanced economies. Through its financing programs, the federal government provides much more support for its economy than most people realise. It currently operates 129 distinct credit assistance programs, totaling $1.9 trillion in annual support. These programs evolved from supporting agriculture to subsidising home ownership in the consumer economy, then expanded to student loans as the knowledge economy took root. The attraction of using credit as a mechanism of intervention is that it’s less overt. The biggest component – $1.6 trillion in credit guarantees – doesn’t require upfront spending, only triggering costs if borrowers default. Because they utilize market infrastructure, credit programs are less ideologically contentious than direct spending. Government officials can thread the needle between market and state by channeling credit through enterprises structured just private enough to stay off federal accounts but public enough to follow government mandates.

• I remember where I was the day Congress voted against the bill to create a $700 billion program to bail out the banks. It was Monday September 29, 2008 and I was sitting at my desk alternating between watching market prices on Bloomberg and the unfolding drama on C-SPAN. The S&P 500 ended down 8.8%, its worst day since the October 1987 crash, wiping more than $1 trillion off the value of stocks. The stock market plays a special role in America as a barometer of performance, and there’s nothing like that kind of feedback to focus legislators’ minds. “Sometimes, you know, kids have got to run away from home and be hungry before they come back,” the Chairman of the House Financial Services Committee told Hank Paulson, the Treasury Secretary. The bill passed four days later.⁷

• The narrative of Wall Street’s evolution confirms one abiding law of history: the law of unintended consequences. When regulators capped the interest rates banks could pay on deposits, savers fled to newly created money market funds, inadvertently birthing the shadow banking system. When Basel capital rules required banks to hold more capital against risky assets, they pushed activity into securities that appeared safe on paper but harbored hidden dangers. When rules were adopted in 2010 to limit banks’ trading activities, liquidity in bond markets was drained. Each regulatory intervention triggered market innovations that reshaped finance in ways regulators never imagined. Today, shadow banks manage over $70 trillion in assets – the highest level ever recorded – and their borrowings are growing faster than traditional banks’. Like water finding its way around rocks in a stream, capital flows wherever it can. In finance, somebody, somewhere, is always dancing.

• Something happened the year I was born. A few weeks before I graced the world, President Nixon suspended the convertibility of the dollar into gold. Many contemporary observers viewed the Nixon shock as the end of US economic hegemony and, sure enough, America’s share of global GDP fell from 40% in 1960 to 25% in 1980. Yet this apparent decline marked not the end but a transformation. In May 1974, ex-bond salesman William Simon became Treasury Secretary and struck one of history’s great deals. Flying to Jeddah (reportedly drunk), he convinced Saudi Arabia to invest its oil profits in US Treasury bonds, creating the petrodollar system that would help cement American dominance of global finance. Years later, with international business thoroughly enmeshed in the dollar system, Treasury officials found they could harness America’s financial infrastructure as a tool of statecraft. When my old firm Credit Suisse helped Iranian clients evade US sanctions, disguising $1.6 billion in transactions, US authorities prosecuted and won. “In the world’s increasingly complex financial markets,” the prosecutor declared, “it’s critical that global institutions follow US law.”

• My wife’s sister lives in California. She moved when her husband’s startup relocated from England. The decision was influenced by a need to be closer to customers, but also to be closer to the money. Various reasons have been given for the success of Silicon Valley over the years: government contracts, proximity to Stanford, California labor laws. But what matters most is that’s where the venture capital is and, as well as providing money, venture capital cultivates ties between startup companies that help them flourish. “Without Tom Perkins’s loose ties to his old friends at Hewlett-Packard, Tandem Computer would never have been conjured into being,” writes Sebastian Mallaby. “Without Nolan Bushnell’s loose ties to Don Valentine, and without Valentine’s loose ties to Mike Markkula, Apple might never have become a real business.” Relationships may have sprung up regardless, but American finance greases them.

• Byrne Hobart, a friend of this newsletter and inspiration for its launch, wondered back in 2020 why America is the best country in the world. He looked at natural resources, geography and culture. He cited an interesting study that shows massive net immigration of “inventors” – identified as people who file patents. Asking why they come, he brings it back to finance: “The US is, by far, the best place to raise early-stage funding. It’s also a great place to raise late-stage funding, to hold an IPO, to do a secondary offering, to borrow enough money to take an unloved company private, to hedge any conceivable risk and tweak any imaginable corporate structure. The US has a critical mass of financial skill and available capital at almost any level. This has a complicated relationship with the dollar’s status as a reserve currency; if your career revolves around doing interesting things with money, you’ll have more things to do if the money you choose is the dollar.”⁸

• Today, the US accounts for 4% of the world’s population, 27% of its GDP and 60% of its market cap. Its financial system is the envy of the world. European policymakers bemoan that while households in their part of the world save more than Americans, they keep a third of their assets in low-yielding deposits, compared with a tenth in the US. European pension funds allocate just 0.02% of assets to venture capital versus 2% for their US peers. And the median European venture-backed company receives around half as much funding as its US counterpart. European Central Bank president Christine Lagarde recently calculated that if Europeans matched Americans’ appetite for capital markets, some €8 trillion currently trapped in bank deposits would be unleashed to finance transformation. The constraints reflect decades of path dependence: fragmented markets, complex regulations, and a preference for safety over the possibility of market returns.

• I have visited America around 75 times, probably to around half its states, and after all those trips, some things still confuse me – the tipping culture, the ice-filled drinks, bathroom doors that stop short of the floor. But there’s one thing I do understand: the advantage of deep capital markets. Investment strategist Ben Carlson makes a point: “I honestly think one of the reasons American exceptionalism exists is because we always buy the dip. It’s ingrained in us that things will get better.” That optimism, channeled through the world’s most sophisticated financial system, creates a virtuous cycle. When markets fall, Americans invest more. When companies fail, entrepreneurs start again. It would take a seismic shift in global finance to dislodge that advantage.

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Several book recommendations in here. On Liverpool, Liverpool and the Unmaking of Britain by Sam Wetherell. On American finance, Doing Capitalism in the Innovation Economy by Bill Janeway and The Power Law: Venture Capital and the Making of the New Future by Sebastian Mallaby. On the US Dollar, Chokepoints: American Power in the Age of Economic Warfare by Edward Fishman and Treasury’s War: The Unleashing of a New Era of Financial Warfare by Juan Zarate. On American capitalism more generally, Capitalism in America: A History by Alan Greenspan and Adrian Wooldridge.

Further Reading

Financing the American Home

Government Sponsorship and the Student Loan Crisis

Thirty Years in Finance

All the Devils

The Trump Trade

1. David Rubenstein, co-founder and co-chairman of the Carlyle Group tells a similar story. His ancestors left Ukraine after a pogrom. “But they weren’t that smart and maybe not literate, so they bought tickets to the United States and it was a scam where they only got you to Leeds, England, not the United States. So 40,000 Jews are stuck in Leeds, England for like 20 years or something before they could afford to figure out how to get to the United States.” His grandfather eventually made it to Baltimore, where Rubenstein was born. I once asked him about his family heritage to see if we were related, despite spelling our name differently. Curiously, his family changed the spelling of their name from Rubinstein to Rubenstein; mine did the inverse.

2. Unemployment levels in Liverpool hovered around 20% through the inter-war period, peaking at 28% in 1932. They recovered to 6.5% by 1948, still double the national average. This chronic disparity persisted for decades, with Liverpool’s unemployment climbing from 10% in 1971 to 20% ten years later, where it remained through much of the 1980s. A pivot from dock work to auto manufacturing wasn’t sufficient to absorb the excess labor supply, nor did it endure.

3. Family legend has it that he never really recovered. He died alone in America in the 1940s, badly affected by the Titanic circumstances: guilt that he’d sent people to their death, and jealousy that they had achieved great fame.

4. Retail is an interesting one. As Brad DeLong writes, “Sears and Montgomery Ward discovered at the end of the 19th century that the cost of shipping consumer goods to rural America was no longer a competitive burden. Mail a catalog to every household in the country. Offer them big-city goods at near big-city discounts. Rake in the money from satisfied customers. For two generations this business model – call it the ‘railroad services’ business model – was a license to print money, made possible only by the gross overbuilding of railroads, the resulting collapse of freight rates, and the fact that railroad investors had had to kiss nearly all their money good-bye.”

5. I unshackled my cynicism in Boston one summer, where, as a student, I struck a deal with a local florist to sell flowers to diners in the restaurants around Faneuil Hall. I figured my English accent would give me a competitive advantage. I was wrong – it turns out no-one wants to be sold flowers while eating their dinner. Still, the story got me my first job in finance. And at least I failed fast.

6. While the overall value of home equity is $35 trillion, mortgaged residential properties carry an aggregate of $17.6 trillion in equity. Of this, $11.5 trillion is considered ‘tappable’, according to ICE, meaning it could be borrowed against while maintaining a 20% equity cushion. An estimated 48 million mortgage holders have some level of tappable equity with the average homeowner sitting on $212,000 available to borrow against.

7. It’s another example of the US being quicker to react and quicker to renew. NatWest Group in the UK returned to full private ownership in May this year, after almost 17 years with the government as a shareholder during which time it lost around £10 billion. Other European governments still own stakes in their banks: the Dutch government owns around a third of ABN AMRO and the German government owns 12% of Commerzbank. With the exception of Fannie Mae and Freddie Mac, the US is long out of its banks and financial companies, and made a profit along the way. When it sold its final shares in Citigroup Inc. in December 2010, the Treasury Department trumpeted a $12 billion realized gain — locking in “substantial profits for the taxpayer,” said Tim Massad, the acting assistant secretary for financial stability.

8. Bryne has a great line: “One more measure of how much of a talent magnet the US is: it’s the home of the most valuable company co-founded by someone born in the US (Apple), but also the home of the most valuable company co-founded by someone born in South Africa (Tesla), Russia (Alphabet), Ireland (Stripe), Taiwan (Nvidia), Kenya (Cognizant) ... or Bulgaria (Robinhood).” It’s also home to the most valuable company co-founded by someone born in England: Procter & Gamble, and that’s before the listings migration from London to New York.