Going Ahead or Gone to Smash: An Entrepreneur Struggles in the 1830s

The spectacular boom of the 1830s gave life to the dream of get-rich-quick entrepreneurship, promising a level of comfort and even affluence previously unimagined. A new slang term, go-aheadism, captured the enthusiasm of the day. But this cocky confidence also had a downside, identified by a New York diarist who lamented that go-aheadism had made Americans “the most careless, reckless, headlong people on the face of the earth.” Soon enough, a rich vocabulary also defined business failure: gone to smash, fizzled, wiped out, busted, up a tree, and GTT—for “gone to Texas,” a location outside the United States (until 1845) and therefore out of reach of U.S. law.

Benjamin Rathbun epitomized both go-aheadism and gone to smash failure in the turbulent 1830s. A shy man who was never seen to smile, he shrewdly identified Buffalo, New York, as the perfect location for his first business venture, a fancy hotel. Buffalo, a boomtown, linked the Erie Canal with the Great Lakes, where scores of steamboats departed daily for Ohio and Michigan. The town’s population doubled from 1830 to 1835, and doubled again, to eighteen thousand inhabitants, by 1840. Fueling this boom were brokerage houses that lined Buffalo’s streets, lending money at high interest rates to borrowers speculating in real estate and business.

The success of the Eagle Hotel enabled Rathbun to become Buffalo’s biggest self-made man. In eight years, he built a vast empire of real estate, building construction, banks, stores, and transportation. More than two thousand employees—more than a third of all adult males in Buffalo—were on his payroll. This empire required business acumen, astute management, and a steady influx of borrowed banknotes issued by New York City creditors. Rathbun’s trusted younger brother, Lyman, headed financial operations, while Rathbun kept his eye on the big picture: designing the grand architecture of Buffalo (ninety-nine buildings) and cornering the land on the American side of Niagara Falls for profitable resale. Some people believed that Rathbun owned the falls themselves.

Collapse came suddenly in 1836. Rathbun learned that his creditors in New York City had lost faith in him and were selling his IOUs to brokers at a steep discount, a process known as “note shaving.” To cover the much higher interest rates charged by the new note holders, the Rathbuns negotiated more loans, supposedly backed by a dozen cosigners from the Buffalo business community guaranteeing payment if the brothers failed. When Rathbun applied for a $500,000 loan in an attempt to consolidate his debt, the dozen endorsements were revealed to be forgeries. Benjamin Rathbun was convicted of fraud and sentenced to five years’ hard labor in state prison; brother Lyman disappeared with trunks full of money—“GTT,” many people said.

Rathbun’s spectacular failure plunged Buffalo into a severe depression eight months in advance of the panic of 1837. Although deliberate fraud brought him down, his wipeout highlighted the inherent difficulties in an economy of note shaving and discounting, where loans of millions of dollars were granted on the basis of a few signatures. Historians calculate that something like one-fifth of all businessmen in the 1830s fizzled or went up a tree.

Massive failures in the five years after 1837 led to two striking innovations in business law and loan practices. First, the federal government passed the U.S. Bankruptcy Act of 1841, a controversial and short-term law that enabled failed debtors to wipe debts away legally, paying creditors a fraction of what was owed. Debtors gained release from crushing debt but had to endure the humiliation of having notices of their bankruptcies printed in the newspapers.

Second, the credit rating industry was born in 1841 when a failed businessman opened the Mercantile Agency in New York City. For a $50 subscription fee, lenders could tap into large books containing confidential information gathered by hundreds of agents around the country who assessed the creditworthiness of local businessmen. Church (and saloon) attendance, family stability, and punctuality were often factors in grading businessmen’s reputations for prudence and reliability.

Had it been in existence in 1836, the Mercantile Agency might have unmasked Rathbun’s fraud through semiannual checks on his reputation. The Bankruptcy Act no doubt helped the many debt-saddled Buffalo men who had been caught out by Rathbun’s failure. His liquidated estate paid out first to the thousands of workers on his payroll, second to the lawyers, and third to preferred creditors, leaving hundreds of thousands of dollars of debt unpaid.

When Rathbun left prison in 1843, he rejoined his wife, now running a lowly boardinghouse in Buffalo. Soon the Rathbuns moved to New York City, where the onetime proprietor of Buffalo’s Eagle Hotel returned to his first occupation. With financial help from cousins, he leased a building for the first in a series of increasingly seedy hotels that he ran until his death.

Questions for Analysis

Summarize the Argument: What factors led to the Rathbuns’ downfall?

Analyze the Evidence: How did the new credit rating agency, established in reaction to the panic of 1837, intend to prevent economic crises?

Consider the Context: What were the causes of the panic of 1837? Did Jackson’s war against the Bank of the United States have any connection to the panic?