Collection of the Museum of American Finance

By Tracy V . Maitland , F . Barry Nelson and Daniel G . Partlow

The first US convertibles funded growth companies in the early 19th century . Railroad construction required large amounts of capital — and promised growth . Hence railroads were ideal issuers of convertible bonds — foreshadowing the use of convertibles by such 21st century technology companies as Amazon , NVIDIA , Spotify and Tesla , which together issued 11 convertibles between 1999 and 2021 .

Rome , Watertown and Ogdensburgh Rail Road Company convertible bond certificate , dated 1874 .

Railroad Technology : Growth , Decline and Recovery

The earliest American convertible we identified was issued by the New York & Erie Railroad in 1843 . During this time , steam locomotion was an exciting new technology . Railroads were disruptive and innovative growth companies that enhanced trade patterns and migration , and they drove canal companies out of business . The only canal carrier with the foresight to build a railroad was the Delaware & Hudson ( D & H ); the D & H Railway survives as part of the Canadian Pacific Kansas City system .

The United States was a fast-growing emerging market in much of the 19th century . American railroads sometimes issued convertibles in London and often adopted the British appellation railway .

The golden age of US railroad expansion was in the decades following the Civil War , when mileage soared from 35,000 miles in 1865 to a peak of 254,000 miles in 1916 . The Morris & Essex Rail Road ( M & E ) in New Jersey issued a $ 3 million convertible bond in 1869 with a 7 % coupon — and a restriction that it was convertible for only five years , which forced the bondholders to convert if the stock was above the conversion price on the fifth anniversary of issuance . ( In 2011 , Bank of America issued a $ 5 billion 6 % private preferred security to Berkshire Hathaway that was usable to exercise warrants that expired in 10 years — which created the same imperative to convert as the time limit on the 1869 M & E convertible .)

38 FINANCIAL HISTORY | Spring 2024 | www . MoAF . org