Caldwell and Company
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Caldwell and Company

A Southern Financial Empire

John Berry McFerrin

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Caldwell and Company

A Southern Financial Empire

John Berry McFerrin

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About This Book

This is the fascinating, detailed account of the rise and fall of the largest banking house ever before established in the South, whose financial misfeasance during the prosperous twenties led to its eventual collapse and brought ruin to numerous innocent investors. Caldwell and Company was founded in Nashville in 1917 by Rogers Caldwell, the son of a leading local banker and businessman. Beginning as a small underwriter and distributor of Southern municipal bonds, the firm soon branched out into real estate bonds and industrial securities as well. Control of important banks in Tennessee and Arkansas was acquired; newspapers, and even Nashville's professional baseball team, came under the firm's ownership. Caldwell and Company was, truly, a pioneer conglomerate. Caldwell and Company also ventured into the realm of politics, supporting certain politicians (notably Colonel Luke Lea) with questionable benefits accruing to the firm, including substantial state deposits in Caldwells Bank of Tennessee. In November 1930 the firm went into receivership. Unethical practices, including overextension in the acquisition of banks, insurance companies, and other business, had already strain Caldwell and Company's assets. With the 1929 collapse of stock prices. Rogers Caldwell could not meet the company's obligations, and he began to squeeze all available cash from the various controlled firms. He also negotiated a merger between Caldwell and Company and Banco-Kentucky Company of Louisville—a transaction which must stand as one of the strangest deals in the annals of American business. Even the aforementioned State of Tennessee deposits, which helped float his empire for a while, could not prevent its collapse—a collapse which resulted in a multi-million dollar loss to Tennessee's Treasury, public hysteria, and clamor for the impeachment of the Governor of Tennessee. Originally Published in 1939, this edition includes a new introduction in which the author comments on the long-run implications of the Caldwell episode and reports the outcome of legal actions, both civil and criminal, still pending at the time the book was first published.

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Year
2021
ISBN
9780826504746

CHAPTER I

THE FOUNDING OF CALDWELL AND COMPANY

A NEWLY established Southern municipal bond house in the fall of 1917 was faced by at least two considerable obstacles to success. The more important and general obstacle, one that confronted bond houses all over the country, was the effect on the bond market of the entrance of the United States into the World War. To finance the war, the United States government appeared as the prime borrower in the capital markets for the first time in many years and to a large extent attracted the funds of those investors who normally bought municipal bonds. The superior safety and marketability of the Federal issues, coupled with the spur of patriotism that was freely and vigorously employed, assured the successful sale of these issues, regardless of what the effect might be on other types of bonds.
Facing competition of this kind, municipalities were forced to offer their bonds to yield a rate decidedly higher than Federal bonds or not sell them at all. Market values of the outstanding obligations fell and continued to do so as the financial requirements of the Federal Government grew larger. It was not until 1918 that the Capital Issues Committee of the War Finance Corporation was set up, but the feeling throughout the country that issues other than war loans should be postponed, coupled with the fact that if municipalities sold their bonds they must yield higher rates, was sufficient to reduce appreciably the demand on the money markets made by municipal issues. The successful sale of $2,000,000,000 of Liberty bonds at 3.5 per cent in June, 1917, and of $3,808,766,150 at 4 per cent in October of the same year is indicative of the willingness of the market to absorb these bonds and to let other issues have what money was left.1
Another obstacle to the success of a Southern municipal bond house was more local in character. It was that municipal bonds of the South were not regarded with unreserved approval in the bond markets of the country. The stigma attached to such bonds, due to a rather long history of defaulted issues, remained a sufficiently potent influence to make them relatively unattractive to investors. Municipal bond defaults in the South began at least as early as 1839 when Mobile, Alabama, defaulted its bonds and the practice reached its peak after the Civil War as a result of carpetbag administrations in most of the Southern states. It was primarily the experience during this latter period that resulted in the generally lower standing of Southern issues.2
With the bond market overshadowed by Government financing and Southern bonds even in normal times considered inferior to bonds of most other sections of the country, the time seemed hardly appropriate for establishing a Southern municipal bond house. But such were the conditions when, in 1917, Rogers Clarke Caldwell, at the age of twenty-seven, launched Caldwell and Company in Nashville, Tennessee, to deal in Southern municipal bonds. In the space of thirteen years this firm became the largest investment banking house the South had ever had.
There were two factors, other than the personality of the founder, that augured well for the business. The first was the position of Nashville as a security market. Security trading in Nashville dated at least from 1857, when the security house of Thomas S. Marr was established. This house and its direct successor, the firm of Goulding Marr and Brother, owned by two sons of Thomas S. Marr, still continued in the security business there in 1917. Trading in securities had long been the chief interest of investors and speculators in the town. Whereas in certain Southern cities speculation in cotton was the dominant trading interest and in others real estate operations were most prominent, securities have received primary attention in Nashville. This has taken the form of trading in stocks and bonds listed on the New York and other exchanges as well as in local securities. Stocks of certain Nashville banks, and securities of railroads with their chief offices in Nashville, of the local street railways, of the old Cumberland Telephone and Telegraph Company, and of some local industrial firms had at various times been quite actively exchanged. Also a substantial part of the bonds of Tennessee municipalities, as well as those from neighboring states, was handled through Nashville each year. Due to this traditional interest in securities, Nashville appears to have been the logical place for establishing an investment banking house.3
The second favorable factor was the name Caldwell, which, while not the oldest name in Nashville business and financial circles, was certainly one of the best known. In 1870, at the age of sixteen, James E. Caldwell had come to Nashville, where he obtained employment in a wholesale grocery house.4 Finding it difficult one day to fill an order for millet seed, he proceeded on his own account to buy up the entire supply in the city, thereby cornering the local market. The next day he sold his seed for twice the price he had paid. The profit he made from this venture enabled him to start “shaving” notes. His activities from that time on were many and varied but nearly always profitable. In 1876 he went into the insurance business in which he remained active for many years. In 1883 he became interested in the Cumberland Telephone and Telegraph Company. Later he sold his interest in this company and in 1887 built the Glendale Street railway line in Nashville, which he sold in 1889 and again purchased a large block of stock in the telephone company. The following year he became president of the company, holding this office until 1913 when he became chairman of the board of directors, an office he held until 1925.
Meanwhile, Mr. Caldwell had also become interested in the Fourth National Bank of Nashville. Some eight years after coming to the city he had become a director of this bank and by 1912 was its dominant figure and largest stockholder. A merger of this institution with the First National Bank was inaugurated in 1912 and successfully carried through by Mr. Caldwell, after which he assumed the presidency and became the active head of the institution, the Fourth and First National Bank.
In 1910 one of Mr. Caldwell’s younger sons, Rogers Caldwell, after two years of study at Vanderbilt University, wanted to enter business and his father gave him the desired opportunity by admitting him to his insurance company, a firm operated as James E. Caldwell and Son. The company wrote all types of insurance and Rogers Caldwell became primarily interested in selling surety bonds.5 When counties and towns sold bonds for a construction project, he would get in touch with the various parties involved and write the contractor’s surety bond. In this way he became acquainted with a large number of officials in near-by Tennessee communities, who at times requested him to attempt to secure bids for the bonds the municipalities intended to offer. His experience in doing this gave rise to the idea that a Southern house could be organized to deal profitably in Southern municipal bonds. This idea no doubt grew as Caldwell became more active in handling this type of business, and his experience with one issue for which he had presented a bid for a Chicago bank caused him to determine definitely to establish a Southern municipal bond house of his own.
Hickman County, Tennessee, offered in May, 1915, an issue of bonds and Rogers Caldwell was asked to get a bid for them. He succeeded in obtaining an offer from the Harris Trust and Savings Bank of Chicago and on the date of the sale, May 7, went to the county seat, Centerville, to follow up the bid. While he was there he received a telegram from the Chicago house withdrawing the offer. The sinking of the “Lusitania” the previous day had so upset the security markets that the bank felt it could not afford to make the commitment.
The experience made a decided impression on Caldwell. It revealed to him how sensitive the bond business of the South was to external forces. To him it appeared that whenever money tightened for any cause the South was the first to feel the stringency. He was impressed in this instance, as well as by his former experiences, with the great possibilities for profit in the handling of Southern municipal bonds because of the restricted number of bidders. Caldwell has stated that on his trip back to Nashville, after he had been forced to withdraw the bid of the Chicago firm for the Hickman County bonds, he resolved to establish a Southern municipal bond house.
For some two years Rogers Caldwell was content to carry on his bond business on a small scale through his father’s insurance firm, James E. Caldwell and Son. No commitments were made for bonds in the name of the company but Rogers Caldwell earned small commissions by obtaining buyers for various issues. Under this arrangement the danger of being unable to secure a buyer for a given issue remained and, since James E. Caldwell did not want to add a bond department to his business and Rogers Caldwell wanted a business of his own, an entirely distinct organization, Caldwell and Company, was established in September, 1917.
A charter was obtained from the state of Tennessee on September 26, 1917, creating Caldwell and Company “a body politic and corporate for the purpose of dealing in, buying and selling securities, stocks and bonds” and authorizing a capital stock of $100,000. This capital was divided into 1,000 shares, with a par value of $100 each, all of which was owned by Rogers Caldwell, although directors’ qualifying shares were issued to Dandridge Caldwell, Meredith Caldwell, and C. W. Caldwell, all brothers of Rogers, and to L. J. Trousdale, a relative by marriage. These men, together with Rogers Caldwell, constituted the original incorporators and directors of Caldwell and Company.6
The first meeting of the stockholders was held on October 23, 1917, at which time the directors were elected and the by-laws of the company adopted. In addition to the customary provisions, one section of the bylaws provided that “no officer or employee shall be retained in the service of the corporation whose expenditures seem to be profligate or to exceed his known income, or who is not sober and of good moral character.” On the same date the first meeting of the directors was held and officers were elected. Rogers Caldwell became president and treasurer and Dandridge Caldwell, vice president. Colonel Harvey C. Alexander, who had been a bond buyer for a number of years and had agreed to work for the new company, was chosen as secretary.7
Most new corporations having only common stock are supplied with funds with which to begin their operations either from contributions of the incorporators in exchange for stock or from the sale of stock to the public. But such was not the case with this company. The entire capital stock of $100,000 was issued to Rogers Caldwell and his account with the corporation was charged with that amount. Thus the company began operations with capital stock of $100,000 and accounts receivable of the same amount. When the company bought its first issue of bonds from Robertson County, Tennessee, the bonds were hypothecated with the Fourth and First National Bank to cover a loan to pay for the issue, the loan being repaid out of the proceeds of the sale of the bonds.8
The first offices of the company were at 205 Third Avenue, near Union Street, in the financial section of Nashville.9 The offices were small but sufficient at first for the volume of business and the personnel. Rogers Caldwell was the only director active in the business. He, together with Colonel Alexander, who devoted his entire time to buying bonds, and two clerical assistants composed the company’s entire personnel.10
The fever of expansion began to show itself at a very early date in the company’s life. In the early part of 1918 Goulding Marr and Brother was purchased by Caldwell and Company for a “nominal” amount.11 Goulding Marr desired to retire from business and arranged for the sale of the company. In the transaction Caldwell and Company obtained the services of Frank D. Marr, made him vice president, and placed him in charge of local sales. His long connection with the security business in Nashville and vicinity made him of great value to the new company. Also, Caldwell and Company obtained the banking house which had been occupied by the Marr firm, a much more desirable location than the offices occupied at first.
With Caldwell and Company’s business increasing, additions to the personnel had to be made from time to time. A few months after the Marr firm was purchased, another bookkeeper was needed. James DeWitt Carter, a young draft teller at the Fourth and First National Bank who had made quite a favorable impression on Rogers Caldwell, was employed for this position at a salary of $175 a month and immediately became very active in the business.12 The company’s first branch office was established in the early part of 1919 in St. Louis. Edward J. Heitzeberg, who was then active in the investment banking business, was placed in charge of the branch.13 Its operations were at first quite small but this office in St. Louis furnished the company early in its life with connections in a city where later some of its largest transactions were to take place.14
A final step taken by the promoters of the business during its earlier years of operation was the establishment in 1919 of the Bank of Tennessee, which was completely owned and controlled by Caldwell and Company. From the beginning, Caldwell and Company had bought bonds under depository agreements. These agreements provided that proceeds from the sale of bonds should be left on deposit with banks acceptable to Caldwell and Company until the funds were needed to pay for actual construction on the projects being financed.15 In many cases deposits were left directly with Caldwell and Company. It was thought, though, that it would appear better if the funds were deposited with a bank. Yet Caldwell and Company needed these deposits as working capital if the business was to continue to expand. The solution of the problem lay in the establishment of the Bank of Tennessee.
The bank was chartered under the laws of Tennessee and had a capital of $200,000 and a capital surplus of $50,000. It occupied the same offices and had the same personnel as Caldwell and Company. Its existence as an institution separate and distinct from Caldwell and Company was in no way advertised to the general public, and it is no doubt true that relatively few people except those individuals who had business connections with the bank knew it existed. There were no signs on the building notifying the public of the location of the Bank of Tennessee, no tellers’ windows, always little cash on hand, and usually little in its depositories. At no time did it attempt to secure deposits of individuals and its customers were limited to those municipalities, and later business corporations, which Caldwell and Company financed. Funds which were left on deposit with the bank were, from all practical considerations, on deposit with Caldwell and Company. The extremely important role of the bank in the company’s development is revealed in its later history.
Very early in its existence the promoters of Caldwell and Company prepared for a period of rapid expansion. Prestige in the financial community was enhanced by the name of the firm and by the purchase of the old Marr house. Funds for operating the business were more readily obtained because of the establishment of the Bank of Tennessee. The men who were to help Rogers Caldwell with the executive direction of the business, namely, Carter and Heitzeberg, had already been brought into the company. These two men, as well as Rogers Caldwell, were young, aggressive, and ambitious; and all of them were determined to make a success both of the company and of themselves. The stage was set for the very rapid growth of the company.

CHAPTER II

MUNICIPAL BOND OPERATIONS

THE OBSTACLES in the municipal bond market which confronted Caldwell and Company when it began operations did not long continue.16 With the issuance of the Victory Loan in 1919 the Federal Government ceased to dominate the bond market, thus giving state and local governments more favorable conditions for floating their issues. Then, too, the South at the end of the World War was about to go through a period of extremely rapid development, a fact which was of tremendous importance to Caldwell and Company not only in the development of its municipal bond business but also in all of its other activities.
The war and high prices brought a degree of prosperity to the South greater than any experienced since pre-Civil-War days. Cotton prices soar...

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