Equally important in attracting clients were the firm's own growing capital resources. In December 1886 Oliver Peabody reported to the Barings that the firm had distributed $25,000 to the clerks, "the usual percentage... we can safely divide from $450,000 to $500,000 for the year, or rather since the 1st of February." The next year, in submitting its regular statement to its London associates, Kidder, Peabody reported that the joint account stood at $13.8 million and suggested using some $5 million or $6 million "for a speculation" in Santa Fe stock, "buying upon a declining market to the amount, possibly, of 25,000 shares... to be carried... until we realize the profit, which we feel is quite sure to come." Meanwhile, the firm reported it was continuing to add to its capital. By the end of the century the amounts often were substantial. "You will be grateful to know," Francis Peabody informed the Barings early in January 1893, "that after making up our accounts to Jan. 1st on a very conservative basis; we have added $500,000 to our capital during the past year".
Since relatively few American banking houses were able to satisfy the huge demand for capital that railroads needed to expand, improve, and reorganize their systems, firms like Kidder, Peabody occupied a strategic position in the economy. During the last quarter of the nineteenth century most of the principal railroads and many other large corporate borrowers, notably the new industrial combinations that were launched in the 1890s, developed and maintained close ties with one or more banking houses, depending upon them for financial assistance in times of prosperity as well as depression.
The growing needs of these corporations led the bankers that financed them to concentrate increasingly upon providing investment services to the users and suppliers of capital. Although few firms, if any, specialized exclusively in what came to be known as the investment banking business, most of them, while continuing to offer a diversity of financial services, came to be associated chiefly with corporate finance and the securities business, specifically with the job of originating, underwriting or purchasing, and distributing new issues. In performing these functions investment firms, like Kidder, Peabody, extended and revised practices developed earlier, many of them in the 1850s when railroad securities first appeared in substantial volume. Growth in the number and size of these offerings in the post-Civil War years led to the institutionalization of practices previously employed informally. In the 1850s J. E. Thayer & Brother and similar firms like Winslow, Lanier & Co. had provided financial advice to railroad managements on an ad hoc basis; in the 1880s the more common practice was to have the banker sponsoring a company's securities represented on its board of directors.
Nor was the custom of bankers joining together in groups, or syndicates, to pool their resources and spread the risk a post-Civil War innovation. Associations of this type had been employed before, especially in the sale of government bonds. The change came in the frequency with which these groups were employed and the variety of uses to which they were put. Kidder, Peabody, for instance, organized and participated in many types of syndicates, some to purchase securities, others to underwrite new offerings, and still others designed to distribute blocks of bonds and stocks to brokers, investors, or both.
The ability of firms like Kidder, Peabody to raise capital through the sale of securities rested, of course, on the confidence of investors. To protect the interest of those who entrusted their funds to them as well as their own reputation, investment bankers employed various devices. They accepted representation on the boards and finance committees of the companies whose securities they sponsored, hoping that their presence there would prevent the adoption of policies that might endanger the solvency of the corporation. Because investors believed banking representation of this type meant that their interests would be served better, company officials encouraged the practice since it helped the sale of their securities. Some corporations, railroads as well as industrial companies, valued these arrangements sufficiently to advertise the name of the bankers on their board, hoping the prestige of the banking house would spill over to them.
There were other reasons beyond the need for self-protection that led partners in investment houses to maintain their association with the companies they sponsored. The banker that originated a corporation's securities often became its transfer agent or bank of deposit. Familiarity with the corporation's affairs and the ties the banker established with its officials also made it likely that his firm would be called upon the next time the company needed new capital. Kidder, Peabody's intervention in the Santa Fe, like the reorganizations negotiated by other bankers, was designed not only to restore the company's credit and inspire confidence in its securities but also to permit the firm to earn a fee for its various services.
The stands Kidder, Peabody's partners took on public issues reflected their concern with maintaining credit, aiding business, and attracting capital investments. Francis Peabody, writing to John Murray Forbes in August 1882, said he had "no interest in Republican politics" because he disapproved of the party's tariff and tax policies. "I do not expect to feel any interest in politics until some party arises whose principal object is a reform of the Civil Service and a considerable diminution in Government revenue and in the number of officials now employed to collect it." The partners' views on these and other major issues of the day, notably attempts to get Congress to regulate the railroads and inflate the currency, both of which they strongly opposed, placed them solidly in the ranks of the more conservative elements of the business and financial community.
During the 1880s Kidder, Peabody was considered one of the country's more cautious and responsible banking houses. In May 1882 the Boston Evening Transcript, criticizing several Wall Street firms for having "smirched their names" in various transactions, proudly proclaimed that "there is no house in New York of equal standing with that of Messrs. Kidder, Peabody & Co. of Boston." Four years later, at the time of Kidder's death, The New York Times described the firm as the "leading banking house in New England," occupying a position in American finance "analogous to that of Drexel, Morgan & Co."
J. Pierpont Morgan, then the head of Drexel, Morgan, also considered Kidder, Peabody a major banking house. In January 1889 he invited it to participate in a conference to be attended by officials of the country's major railroads. The only other banking firm invited to the meeting, officially known as the Interstate Commerce Railway Association, was Brown Brothers & Co. The purpose of the conference was twofold: to establish a committee to enforce the Interstate Commerce Act, which Congress had passed in 1887, and reach an agreement on rates that would ensure profits and put an end to the destructive competition that threatened the solvency of various roads. Morgan failed to achieve his objectives, but many of the suggestions made by the bankers were affected after the panic of 1893.
Kidder, Peabody's partners attributed the crisis that broke with the stock market crash of June 1893 to private greed and mismanagement, as exemplified by some of the nation's rail-road and business leaders, together with lack of confidence in the government's monetary policies, specifically Congress' failure to repeal the Sherman Silver Purchase Act of 1890. Six months before the stock market break Francis Peabody wrote President Benjamin Harrison that the government and the country were headed for serious trouble. He cautioned the President, who had just been defeated in his bid for reelection, that the Treasury's continued silver purchases under the terms of the Sherman Act were checking the flow of foreign capital to the United States, "which impresses me as an unnecessary evil to us all". Buying silver, he told the President, also would drive gold to a premium, precipitating a severe panic "from which it would take the country years to recover." Repeal of the Sherman Act was accomplished by Harrison's successor, President Grover Cleveland, who summoned Congress into special session on June 30, three days after the stock market collapse. By then it was too late to stem the tide and by the end of the year more than 400 banks and some 15,000 businesses had failed.
Kidder, Peabody weathered the crisis easily. "Business is of course quiet," Francis Peabody wrote his brother at the height of the panic, "and we are neither making nor losing much money." One of the firm's important services during the worst month of the crisis was to import $1.5 million in gold to help relieve the critical need for currency.
Meanwhile, the firm tried to influence its representative in Congress to adopt measures it considered necessary to restore confidence and prosperity. It sought, among other things, to persuade its member of Congress to press for a revision of the Interstate Commerce Act, one which would allow certain types of railroad pools. "A large part of the loss and disaster which we have all suffered" Oliver Peabody wrote Congressman William Everett, "has come from the prohibition of pooling. It keeps Western railroads in perpetual warfare and makes peace impossible. Furthermore, it keeps them all busy with offering secret rebates to important customers, as for instance the wealthy cattle dealers of Chicago. This practice not only impoverishes the railroads, and demoralizes their employees, but it gives the wealthy shippers a great advantage over the smaller ones. The larger the business is, the bigger the rebates that can be got. The consequence is that the small dealers are obliged to pay higher rates for transportation than the larger ones. In other words, the pooling prohibition creates the very trouble that it was intended to cure.
Asked for its views on various proposals to alter the currency, Kidder, Peabody replied that the "present banking system, based upon U.S. Bonds, is certainly the best currency ever possessed by any nation upon the face of the earth, so long as our government maintains its determination and possesses the ability to keep up gold payments... This may seem a strong statement, but it is true; whether in Norway, Turkey, Africa, India, Japan, or any other country, a U.S. national bank note is par or about par. For safety and convenience combined, I repeat that it is unequalled by any currency existing on the face of the earth." The operation of the system needed to be improved so that "the currency would contract on a plethoric money market and expand on a tight money market," but Kidder, Peabody doubted the times allowed for the careful thought and study required to achieve sound changes in the banking laws.
Like most other conservative banking houses, Kidder, Peabody was disturbed and frightened by various demands to inflate the currency. William Jennings Bryan's silver crusade and his capture of the Democratic nomination for President in July 1896 brought business to a near halt. "The feeling of uneasiness is very general, and it wouldn't surprise me if the thing culminated in a panic," Francis Peabody wrote his brother. The firm had taken the necessary precautions: "Are keeping Barings fully remitted, have all our Bank loans now on long time, and ample cash balances in hand so that I suppose we can stand it as well as the rest if it comes/' Peabody reported. No crisis occurred, and Bryan's defeat in the November election dissipated Peabody's remaining fears.
