December 7, 1841, was a notable day for Dr. Isaac Coe. The doctor was one of the first medical practitioners in the new city of Indianapolis and enjoyed a favored spot within the community. Aside from his role as a physician, where he was credited with helping save the city from a particularly virulent wave of fever in 1821, he was also a prominent member of the local religious community, having founded the first sabbath school in the city in around 1822. But on December 7, Coe, and several of his contemporaries were commanded by resolution of the Indiana Senate to appear before that body and provide sworn testimony regarding their potential crimes against the people of Indiana.
Coe’s alleged crimes stemmed from the Internal Improvement Act of 1836, the landmark legislation passed on January 16, 1836, which called for the construction of an expensive program (expected cost of around $16 million) of public works projects, including canals, roads, and railroads. Often referred to as the “Mammoth Internal Improvement Act,” the scope of the legislation certainly justified the ‘mammoth’ moniker. Several years later, state officials would observe that “[t]he passage of this bill was hailed by the newspapers as a new and bright era in our history with eulogistic praise; our villages were illuminated and am almost unbroken voice of approbation pervaded the state.”
To pay for the program, the state officials believed that the revenue produced by the partially completed projects would help cover some of their cost, although this revenue would take some time to mature. To address the more immediate need for money, and without imposing a tax on the citizens of Indiana, the state issued bonds. A bond is a type of financial security, where the purchaser would pay money to the state for the bond, with the understanding that the state would pay back the purchaser the price paid over the course of a period of time, plus a set amount of interest. Thus, the state would receive an immediate and substantial influx of cash with which to construct its improvements, while the purchaser held an investment which would, if all went according to plan, pay back the original purchase price, plus interest, at some later date. By the time this obligation came due, the improvements being constructed by the state were expected to have been in at least partial operation and providing income.
A board of Commissioners was appointed to oversee the various projects, along with a group of three Canal Commissioners who were charged with obtaining funds for the construction of the canal projects through the sale of bonds. Financing was to be found through banks and other firms in the great cities on the east coast, where Indiana hoped to find a market for its various bonds. While many banks were legitimate institutions, numerous others were ‘wildcat’ operations, undercapitalized but still issuing currency, and taking advantage of the Free Banking laws which were passed on a national and state level in the mid- to late-1830’s.
In 1836, Dr. Coe was appointed as a Fund Commissioner, replacing Nicholas McCarty, himself one of the most prominent citizens of Indianapolis, who had been serving in his role since the early 1830’s when work on the Wabash and Erie Canal was ramping up. That project was supported with lands donated by the federal government for the purpose of establishing a connection with the Wabash Valley with the Maumee River in Ohio, and ultimately, Lake Erie. Construction had begun in 1832 near Fort Wayne and had been proceeding over the course of the previous few years.
Coe’s appointment was not his first foray into the world of internal improvements. In December of 1834, well before the internal improvement act had been passed, but when the state was already heavily involved in the Wabash & Erie Canal near Fort Wayne, Coe was appointed as a clerk to assist the canal fund commissioners with their duties on that canal. Following his appointment as one of three Canal Fund Commissioners for the entire state, Coe proceeded to travel to New York to conduct the business of the state. Upon his arrival, Coe found that his fellow commissioners had just left the east coast to return home to Indiana. Their leaving was attributed to a lack of success in finding takers for the various state bonds they had to offer. But their departure also left Coe to his own devices, and outside of easy or rapid communication with his home state.
What followed was a complicated process. Coe began to peddle state bonds far and wide, and began to arrange for numerous sales, although these were most often on credit. Being sold on credit meant that the purchaser of the bonds would pay Indiana at some point in the future, but still had control of the security. The practice of selling on credit was not expressly prohibited by state officials or legislative act, but was extremely risky, considering the breadth of the internal improvements under construction in Indiana, and the need for funding to keep the projects moving forward. At the time there was a large amount of capital available in Europe for investment purposes, providing a fertile ground for American bonds.
So, while the bonds were in circulation, both in the United States and eventually abroad, Indiana was on the hook for the interest payments, and in many cases, money had not yet been received for the bonds. At first there was enough funding being received that this arrangement did not hinder the construction of the canals and other projects, and indeed, some of the sales arranged for by Dr. Coe did result in payments to the state. But as time passed, this would, to put it simply, come back to haunt Indiana.
As Coe was distributing Indiana bonds on credit, still a very ill-advised practice, his own connections with the companies which whom he was dealing began to become intertwined and more personal. And this is where Dr. Coe began to cross the line from dutiful civil servant, to working to advance his own self interests. All the while, he operated with little to no oversight from his home state. Indeed, as noted in the book Indiana Canals by Paul Fatout, the Indianapolis Journal newspaper declared Coe “an intelligent and honest man; and a more conscientious public servant the State has not.”
For many outside observers, this may have their view of Dr. Coe. However, his personal business with these companies would prove quite profitable for him. One of the companies Coe was dealing with was the Morris Canal and Banking Company based out of New Jersey. The company had been chartered in the 1820’s to construct what became the Morris Canal, at the behest of the New Jersey legislature. The Morris Canal, completed in stages ending in 1837, cut across the northern section of New Jersey and was used to primarily transport coal. While part of the bank’s funding was tied to the canal another part was to be used for investment purposes, which resulted in the bank becoming heavily invested in various other internal improvement projects throughout the country over the course of several years.
Besides selling bonds to Morris on credit, Dr. Coe also became one of the company’s largest stockholders, and essentially its agent in its dealing with Indiana securities. In this role he earned commissions on some of the transactions he executed with Morris using Indiana securities. He also received dividends on the stock he owned, the stock which he had also purchased at a very steep discount, around 50 cents on the dollar. In 1836 Morris received nearly $900,000 in state bonds from Dr. Coe (roughly $30 million today). Early in 1837, when the state’s internal improvements were in their initial stages of construction, Morris owed Indiana nearly $600,000 in payments, an amount which increased to $733,000 the next year, 1838.
At the same time, Dr. Coe also became financially involved with other institutions in addition to Morris, including the New York Staten Island and Whaling Company, and the Staten Island Bank, both of which would receive Indiana state bonds through sales from Dr. Coe and transfers from other entities. He also made just plain poor decisions, including providing $300,000 in state bonds to a wildcat bank in western New York, which used the $300,000 to capitalize itself, and then only paid $60,000 to the state. The bank would later provide Dr. Coe with a mortgage to land in the Carolinas, supposedly worth $1 million, but which investigators later admitted the state would be lucky to realize $50,000 from the property. Coe’s questionable business dealings would raise red flags, and as early as 1838, rumors were swirling about his actions on the east coast. An article in the June 16, 1838, edition of the Indianapolis Journal, the local Whig leaning paper, criticized its Democrat counterpart for calling into question the character of several local Whigs. Included among these was Dr. Coe in his role as fund commissioner. The Journal decried the attack on the “venerable Dr. Isaac Coe,” whose character “is known and properly appreciated.”
The financial panic of 1837 spread westward, eventually hitting Indiana in 1839. But problems had already begun. As the economic panic worsened, many of the companies who owed the state money for the purchase of its bonds began to fail and defaulted on their obligations. The Morris Canal and Banking Company began to collapse in the summer of 1839, along with several other companies dealing in Indiana bonds. In many cases the various companies still owed money to the state for their prior purchases of bonds on credit. Morris defaulted on its Indiana payments in July and August of that year, leaving over $2.5 million unpaid. The Morris company had used Indiana bonds purchased from Dr. Coe on credit to pay off mortgages they had taken on the Morris Canal itself from various European countries, which allowed additional Indiana bonds to enter the hands of foreign creditors.
This lack of funds realized from the state bond sales caused a cash crunch back home. Combined with the lack of any income coming in from the partially and sporadically completed internal improvements, the state could no longer afford to pay the contractors constructing the various projects. In late summer of 1839 work on the internal improvement projects were suspended while the state assessed the situation and tried to figure out a way forward.
In an early postmortem of the situation in 1840, state officials and the canal commissioners acknowledged that in the face of “impatient demand of public sentiment,” and “indirect expressions” of direction from the General Assembly, the state commenced work on several projects at once. This plan, intended to provide some revenue stream, was admitted by the Canal Commissioners as “being directed among too many objects, leaving our works in their unfinished and unproductive condition, with a heavy debt upon us.”
Dr. Coe’s close connections with the entities which were provided bonds on credit, and then defaulted on their obligations (either wholly or partially) attracted much suspicion from the General Assembly. While the state had been injured by the collapse, Dr. Coe had escaped without significant financial losses from his involvement with the various companies. Indeed, he would maintain significant land holdings around Indianapolis, including several lots on the Governor's Circle in the heart of downtown during a time period where many others were forced to disinvest their real estate holdings. State authorities sought to determine how the state’s finances collapsed, and to assign blame to someone, beyond just the general economic depression being experienced by the entire country. Dr. Coe’s actions, which had begun to raise eyebrows even before the collapse, would be subjected to even more scrutiny.
There can be much debate as to whether Dr. Coe was acting with an ill intent, or at least an understanding, that his actions were risky and would result in his personal benefit at the expense of the state. The totality of the circumstances seems to support that he was aware. Dr. Coe was an educated person and had been involved with internal improvements in Indiana since before the Internal Improvement Act was passed and could hardly have not known that his actions were questionable. The state tried to come to grips with the severity of the financial crisis, and the collapse of the internal improvements in 1840-41, and in late 1841, investigations into the actions of the various commissioners, Coe included, were launched. Dr. Coe would proclaim his innocence, seeking to excuse his actions as those of someone trying to help the state, or that they had been approved by those in power, while trying to minimize his own connections with the defunct companies with whom he was dealing.
The investigation of Dr. Coe will be discussed in Part II of this post.
Indiana Canals, Paul Fatout, 1985
Canals in Indiana, Indiana Historical Society, https://images.indianahistory.org/digital/collection/dc035/id/149/rec/1
Indianapolis Journal: June 16, 1838
Internal Improvements in Early Indiana, Logan Esarey, 1912
Another Tangled Web - III, Reflections of the Morris Canal, Robert C. Goller, 2016
Foreign Bondholders and American State Debts, Reginald C. McGrane, 1935
Documentary Journal of Indiana 1840, https://archive.org/details/documentaryjourn18402indi/mode/2up