Philadelphia's warrant system and municipal financial corruption in Dreiser's The Financier

¶ … Financier written by Theodore Dreiser traces the personal and financial life of a fictional financier from the time of Andrew Jackson's administration through the aftermath of the "Great Fire" in Chicago in 1871. This essay identifies three problems in the public financing area that negatively impacted public interest and highlights the rules and organizations that have been created to reduce the probability of these three problems recurring. All three problems resulted from the city of Philadelphia's method used to raise funds. The system penalized small businessmen and benefited large merchants as well as banks and brokers. The people and organizations that knew the city politicians the best received the greatest income from the financing method. When it became necessary to change the funding method, the large merchants, bankers, and brokers attempted to generate even more income.

The problems began prior to the Civil War and continued during and after the Civil War. When the city of Philadelphia had insufficient funds to pay its financial obligations, the city issued a type of financial commitment called a "warrant." The city treasurer decided when to pay off the debt generated by the issuance of the warrants. The city compensated small merchants by giving the merchants some of these warrants. These small merchants needed to cash to stay in business so they were forced to sell the warrants at a discount to bankers and brokers. Large merchants had enough capital so they were not forced sell at a discount. The small merchants received only 90 cents for every dollar of warrants they had to sell. The bankers and brokers who bought the warrants from the small merchants continued to receive a fixed high rate of interest, six percent, and later redeemed each dollar of warrants for their full value. To make the problem worse, the city treasurer did not necessarily pay the required interest if funds were not available in the treasury. So the interest and principal payments were at risk in the short-term when the small merchants most needed the money.

When the public finally recognized how a few people were making so much money from the warrants scheme, the city decided to issue a more typical loan to cover the cost of cashing in the outstanding warrants. Some of the warrants had been issued many years before with the warrant holders receiving a guaranteed return. The brokers and bankers who had most of the warrants contrived to have the new notes sell below par at ninety. They would claim that the only way to attract buyers was to offer the notes at a discount. When people outside the influence of the brokers and bankers realized what the insiders were trying to do, the insiders changed their approach to fool other outsiders to pay par for the notes with the insiders' expectation that the buyers would eventually have to sell the notes at a discount.

To pay off the notes as they became due, a fund was established to hold money to be made available to pay the holders of the notes. The city treasurer took money intended for the note holders and loaned it to his broker, "The Financier." They manipulated the stated value of the loans by creating an artificially low bid for the loans. They then used the low figure when publishing the value of the loans. When the panic created by the Chicago fire forced the financier's lenders to call in his loans, he did not have the money to pay off the loans. Much of the money that the financier lent out came from the fund the city had set up to pay off the notes as they came due. As it became clear that money supposedly in the fund was not there, the politicians found it was necessary to have the financier put on trial. Of course the financier was only one of many people who were manipulating the city's funds.