Nvidia's Risky Business

On the first day of 1870, a man named Jay Cooke—previously celebrated as a financial savior for his work funding the Union during the American Civil War—entered into a contract that would eventually set the stage for global conflict.

The Northern Pacific Gamble

The Northern Pacific Railway Company had been established by Congress in 1864. Its mission was to bridge the gap between the Great Lakes and Puget Sound, stretching from Duluth to Tacoma. As an incentive, the government granted them 40 million acres of land bordering the tracks.

However, for six years, the company struggled to find the money to build, even as the Union Pacific and Central Pacific railroads successfully met at the "golden spike" in May 1869.

The Deal with Cooke

Northern Pacific approached Jay Cooke in 1866. Initially, Cooke declined because the project lacked the federal guarantees that had supported other railroads (guarantees that, ironically, fueled massive corruption). Eventually, Northern Pacific offered a deal too lucrative to ignore:

• A 12% commission on every bond sold.
• $200 in company stock for every $1,000 in bonds moved.

The Marketing Blitz

When institutional investors balked, Cooke pivoted to the public, using the same playbook he used for war bonds:

1. Patriotism: Framing the railroad as a national necessity.
2. Media Manipulation: Funding 1,300 newspapers via direct payments and ads.
3. Mass Distribution: Employing a sales force of 1,500 people.

Previously, if you couldn't get a loan from a bank or the government, you were out of luck. Cooke changed that by making retail investors the primary engine of funding.

The Crash and the Aftermath

By September 1873, the house of cards collapsed. A stock market crash in Vienna and the demonetization of silver caused global credit to freeze. Cooke, who had been bridging the gap between bond sales with deposits, ran out of buyers.

The bankruptcy of the Jay Cooke Company didn't just kill a firm; it triggered the Panic of 1873, leading to a wave of railroad failures, a prolonged depression, and decades of deflation. This economic instability arguably turned Europe into a "tinder box" forty years later.

Despite the chaos, the Northern Pacific line was eventually completed through various bankruptcies. It later merged into the Burlington Northern Railroad, which then merged with the Atchison, Topeka and Santa Fe to become BNSF Railway, eventually acquired by Berkshire Hathaway in 2009.

Drawing Parallels to the AI Era

This historical cycle is the focus of Liaquat Ahamed’s book, 1873. Ahamed argues that to understand the scale of these historical sums relative to today's economy, we shouldn't just look at inflation, but at the size of the overall economy.

The formula for this translation is: $\text{Modern Value} = \text{Historical Sum} \times 1,200$

Using this logic, the annual railway bond issuance during the 1870s boom equals roughly $600 billion today—a figure strikingly similar to the projected AI infrastructure investments for 2026.

The Hyperscaler Divide

Satya Nadella (CEO of Microsoft) is clearly mindful of this history, mentioning 1873 on a recent earnings call. This awareness is reflected in Microsoft's financial strategy:

• Microsoft: Still generates massive free cash flow (e.g., $19.6 billion last quarter).
• The Others: Funding growth through debt.

Debt Issuance Trends (2024-2026)

Warning Signs in the Market

The market is beginning to react to this debt load:

• Rising Spreads: 86% of this year's bonds are trading at higher yields than when issued.
• Falling Cover: Demand has dropped from 5x in February to less than 2x.

The most surprising move occurred in June, when Google announced an **$85 billion equity raise**, which included a specific `$10 billion` issuance to Berkshire Hathaway.

{
  "transaction": "Google Equity Raise",
  "total_amount": "85B",
  "special_allocation": {
    "entity": "Berkshire Hathaway",
    "amount": "10B",
    "purpose": "Signaling Mechanism"
  }
}

As noted in The Google Capital Company, while $10 billion is a small sum for these giants, the signal is what matters: it suggests a shift in how the expected deployment of capital is being viewed.