The Day That Built the Financial Industry
On this day in economic and financial history...
American Express was founded in Buffalo, N.Y., on March 18, 1850. In a unique twist of fate, this company -- originally created as an express mail service -- was the result of the merger of two smaller express-mail companies owned by Henry Wells and William G. Fargo, as well as one owned by John W. Butterfield. Exactly two years later, this pair founded Wells Fargo in New York City on March 18, 1852. These two financial titans would soon take on important -- and occasionally competitive -- roles in the spread of both communications and finance to the American frontier.
Shipping was every bit as important a link in the chain of American commerce in the 1800s as it is today, as the U.S. Postal Service did not deliver packages larger than an envelope until much later in its history. Simply sending stock certificates, contracts, and other official documents required specialized express delivery through a trusted provider, a service for which which both AmEx and Wells Fargo quickly became known.
Wells Fargo took on a banking role from its earliest days, but AmEx did not expand into financial services until it began offering money orders in 1882 and then pioneered the widespread use of traveler's cheques in 1891. Within several years, AmEx was selling more than $6 million in traveler's cheques annually, which would be roughly equivalent to $160 million today. Meanwhile, Wells Fargo had long since established itself as an arbiter of gold values for the forty-niners during the California Gold Rush. This early business became a cornerstone of Wells Fargo, which was founded partly in response to AmEx directors' reluctance to expand to the booming West Coast. By the time AmEx moved into financial services, Wells Fargo had survived a California banking panic in 1855, started the West's leading express business, and opened hundreds of banking and express offices throughout the country.
AmEx would grow into an even larger express-services company than Wells Fargo. At the time of President Woodrow Wilson's wartime nationalization of the railroads in 1917, AmEx controlled more than 70,000 miles of railroad. At this point, AmEx joined Wells Fargo in separating its financial and delivery businesses -- Wells Fargo having already done so in 1905. The Panic of 1907 hit Wells Fargo hard, and it spent years rebuilding from that crash at a time when AmEx thrived as a travel services company. However, conservative management allowed Wells Fargo to survive the more devastating crash of 1929, which destroyed thousands of its competitors.
At this point, the tables turned, and Wells Fargo held a stronger position than AmEx, shares of which had been stealthily bought up by Chase National Bank (predecessor to JPMorgan Chase) through the difficult postwar years, until 97% of AmEx shares were in Chase's hands by 1929. Only the staunch resistance of the owners of the remaining 4,700 shares allowed AmEx to survive as an independent entity until Glass-Steagall forced the separation of banking corporations from nonbanking activities, ending Chase's attempt at a takeover.
After World War II, Wells Fargo and AmEx both took leading roles in the growth of the credit card industry. When Bank of Americaintroduced the BankAmericard (the first modern credit card and the progenitor of Visa ) in 1958, it took AmEx less than a month to begin issuing charge cards of its own. Within five years, more than a million AmEx cards were in use and accepted at more than 85,000 establishments around the world. Eight years later, Wells Fargo teamed up with several other California-based banks to create the Interbank Card Association, which issued the "Master Charge" card until 1979, when it was renamed MasterCard. Today, AmEx has nearly 100 million cardmembers that spend more than $800 billion per year. MasterCard processes over $2 trillion in annual transactions, but its members only spend about a quarter as much per year on average as AmEx cardmembers.
American Express has been a member of the Dow Jones Industrial Average since 1982. The credit card industry's growth has enriched many other companies on the index, including not only JPMorgan Chase and Bank of America, but all of the major consumer-focused components.
Mexican oil for the Mexican people
On March 18, 1938, Mexican President Lazaro Cardenas expropriated all oil holdings in his country from any foreign ownership, thus nationalizing Mexico's oil industry. The expropriation evicted 17 American and British petroleum companies from their properties -- a seizure representing $450 million in value -- after the foreign enterprises refused to pay Mexican workers a $40 million award that had been ordered by the Mexican Supreme Court. This seizure was the culmination of a lengthy battle between Mexican petroleum-industry laborers and foreign oil companies -- a resolution in labor's favor that coincided with Cardenas' drive to nationalize Mexico's natural-resource industries.
Within months, the nationalized industry was consolidated into Pemex, which is today the second-largest private corporation in the world next to Saudi Aramco. The state-owned oil company is one of the Mexican government's largest sources of revenue, as high taxes and royalties claim the lion's share of Pemex's earnings. Seven decades after its creation, Pemex produced approximately 3.1 million barrels of oil per day, contributing about 4.3% of the world's total daily production of oil.
Chase-ing after banking consolidation
Chase National Bank successfully completed a landmark merger on March 18, 1926, three years before it nearly gobbled up AmEx. That day, Chase and the Mechanics and Metals National Bank enacted the largest financial consolidation in American history to that time, creating the Chase National Bank of the City of New York. The new institution was to have $1 billion in resources and surplus capital (plus profits) of $79 million. This bank continued to grow despite the Great Depression, and four years later it acquired the Equitable Trust Company of New York to become the largest bank in the world at a time when many banks fought for their very lives.
A momentous public offering
Visa, which had long been the world's largest credit-card network, finally went public on March 18, 2008, in what was at the time the largest IPO in history by the value of shares sold. The $17.9 billion offering valued Visa at more than $54 billion, a first-day valuation only exceeded by two other companies -- most notably by Facebook and its $100 billion first-day market cap four years later. The successful IPO gave some hope to a beleaguered market that had already seen 21 IPOs canceled since the start of the year as an inevitable financial crisis began to crowd out any sense of optimism. JPMorgan, Visa's largest shareholder, earned a $1.3 billion windfall on its 29 million shares -- enough to cover the eventual cost of acquiring Bear Stearns later that year.
Visa fell with the rest of the market into 2009, but not far -- it never dropped much below its IPO price. Five years later, with recovery in full swing and Americans exercising better control over their debts, Visa has grown into a near three-bagger from its first public day. American cardholders carried some $330 billion in outstanding debt on Visa cards in 2011 after charging $930 billion in purchases. This, combined with $1.5 trillion in Visa debit and prepaid charges for the same year, makes Visa by far the largest processor by dollar volume in the United States.
Wells Fargo's dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever -- but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains? To help you figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.
The article The Day That Built the Financial Industry originally appeared on Fool.com.Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.The Motley Fool recommends American Express, Facebook, Visa, and Wells Fargo. The Motley Fool owns shares of Bank of America, Facebook, JPMorgan Chase & Co., MasterCard, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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