Boom and Bust: The Great Pattison Crash

Transcript

It was Thursday morning, March 16, 1899 and 20 year old Oscar Bergstrom was dreaming of the amazing and profitable future that lay ahead of him as he stood at the precipice of a new century.

He had just invested $10 in the stock market through a friend he met in Sunday school - William Miller, the soon to be owner of what would be called the Franklin Syndicate. Willie said he had his finger on the pulse of the stock market and could deliver a 10 percent dividend per week through his brilliant investment strategy. Willie was so confident in his prowess as an investor he guaranteed it on Oscar's receipt. And Willie was a man of his word. Over the next three weeks, those $1 payments (around $31 in today's money) seemed to float in like a cloud filled with easy money.  Seeing it as a brilliant investment opportunity, so Oscar pumped in another $10, receiving the same receipt and dividend.

For William Miller, this initial ounce of success was just the shot of adrenaline that he needed, he immediately brought on two salesmen, who pocketed a nice 5% commission on every investor they brought into the fund. It didn’t take long before the Franklyn Syndicate went from a Brooklyn phenomenon to a national fascination - all thanks to Miller’s amazing results and a steady influx of advertising money. He was quickly becoming known as the golden boy of Wall Street. For every $10 his investors were pumping in, they made back their money in 10 weeks and the checks kept coming. Things were going so strong William had to enlist some help and brought on Edward Schlessinger as a partner.

Within 7 months, these new money magnates were receiving between $20,000 and $63,000 per day (nearly $2 million dollars in today's money). They had so much cash, the dollar bills were being stacked in piles around the office. To anyone fresh to investing, this looked like a “can’t miss” kind of deal. 

There was one major flaw to this whole operation. For a company being driven by a Wall Street genius with a so-called midas touch, William wasn’t investing a penny of this money. Oh, he did try to invest once. He put $1000 into the stock market and lost all but $5 and some change. And that was enough for him to learn his limitations. And anyway, the scheme seemed to be working beautifully without investing a penny, so why bother taking the risk? His partner wasn’t quite as confident in the long term viability of this strategy and so he smartly asked for his third of the cut to be paid out to him weekly, instead of reinvesting it in the company.

New investors came in and Miller and Schlessinger used their money to pay their older clients dividends. And everybody seemed extremely happy. Even when Postal Inspector William McGuinness became suspicious of this financial windfall, his efforts to find a dissatisfied Franklyn Syndicate client anywhere in the country fell flat. 

But soon the newspaper’s started digging around, trying to figure out if this was all on the up and up. So Willie took on another partner - a not so virtuous attorney, Col. Robert Ammon. He figured that having his legal defense at the head of the snake, he could dodge any legal bullets and look legitimate.

But Ammon’s first concern was cleaning up what he saw as a huge liability - all of those receipts floating around. Talk about a paper trail. So he convinced Willie to incorporate, promising the investors that if they turned in those receipts, he would exchange them for nice fresh stock certificates that could be worth hundreds of dollars each. 

Initially the new plan seemed to be working. But soon new investors became harder and hard to find, yet the demands of the dividends kept draining and draining the funds. The trio realized the jig was up. And on a chilly November morning, they started making plans for an exit strategy. 

Schlessiger would take his $145,000 in cash and would fly to Europe. Col. Ammon suggested that Miller leave the country as well and devised a scheme to get him over the border into Canada. Ammon told Miller he would stay in New York and hide the whole scheme as privileged information - the creditors and investors would never be able to get their money back. But to do this, Miller had to turn over every penny to Ammon to guarantee it couldn’t be touched.

The con man had just been conned himself. 

Schlesinger did get away scot-free with his ill-gotten gains, never to be heard from again.

Ammon spent four years in prison, but walked out with Miller’s fortune safely tucked away from his own personal use.

As for William Miller, the law ended up finding Miller’s hiding place in Montreal and had him extradited back to New York City for trial. It was his testimony that helped convict his double crossing attorney. For his own part, Willie ended up serving a full 10 years in prison. He was a broken man in failing health when he left prison and died without ever seeing a dime from the scheme. Yet he would forever be saddled by the nickname 520% Miller based on his boasting of being able to turn a $10 investment into $52 in a year. His less than savvy investors never recovered a penny and the total losses were around $1 million or $31 million in today’s money.

Miller’s scheme wasn’t something new and he definitely wouldn’t be the last to try it. His future New York copycat, Charles Ponzi would dupe investors out of the equivalent of $192 million dollars twenty years later, and the Big Apple would become littered with schemes in the early 21st Century that would find its apex with Bernie Madoff whose scheme was the equivalent of 53 times greater than even Charles Ponzi - a whopping $18 billion of investor money swindled.

As for whisky, well it had its own notorious swindlers. Two brothers from Edinburgh who found a fast road to fame and easy money, only to discover that opulence, greed, and creative accounting were totally intoxicating. And their sins would fuel both a boom and bust that would be felt throughout the scotch whisky for generations. 

The 19th century was an interesting time for the scotch whisky industry. From the Excise Tax that brought illicit distilling out of the shadows, to the invention of the continuous column still and the mass production of grain spirits - everything seemed to be lining up for a successful industry. 

But the greatest financial success of the spirit wouldn’t come until the last decade of the century - and this great success was fueled by two primary events.

The first was the Spirits Act of 1860. Up until then, the Highland distillers producing gallon after gallon of single malt whisky had been at the mercy of the much more popular and refined Irish whiskey market. Highland whisky was seen as rough and untamed, while Irish whiskey was refined and highly drinkable. Yet, the law did not allow for malt whisky to be tamed and blended with anything other than another malt whisky. So the British Parliament eased the rules and soon John Dewar, Andrew Usher, Alexander Walker and others took up the craft of blending scotch whisky with grain whisky.

The second major event was the Great French Wine Blight that was terrorizing the vineyards in France and throughout Europe. Brandy and cognac had long been seen as the drink of choice for English gentlemen. But in the second half of the century, a little insect, most likely brought to the region by boats sailing from America, started chewing up vines across the continent, almost single handedly destroying the French wine industry. It is estimated that between 1875 and 1889, French wine production fell by two thirds. 

With wine very difficult to acquire and master blenders turning scotch into not only a palatable drink but a desirable one, the stage was set for a whisky golden age.

For two brothers from Leith, just north of Edinburgh, there was gold in that magic elixir. 

Robert and Walter Pattison were two sons that had been brought into the family’s dairy wholesaling business in 1882. After learning the ropes and taking the helm, in 1887 they decided that whisky blending was just too sweet an opportunity to pass on. They immediately launched their first two brands, Morning Dew and Royal Gordon. 

Over the next two years, the brothers saw the market quickly evolving. Speculators started to emerge. People were borrowing money from the bank to buy stores of whisky, which they saw as a cash cow on the horizon. And banks were all too willing to shell out as many loans as people wanted to take out, because it would all be backed by gallons and gallons of valuable whisky.

Seeking to get some of that investment money in their own business, Robert and Walter put Pattison, Elder, & Co. on the London Exchange, and cashed in immediately bringing £100,000 into the company. 

For two young men, just getting started out in business, it’s not hard to imagine this quick wealth went straight to their heads. But they weren’t alone. The industry was expanding at breakneck speed. Just during the 1890s, Scotland saw almost 40 distilleries come online. 

Not wanting to waste the opportunity, the brothers began hiring salesmen left and right. Called travellers in those days, these salesmen were sent on a mission to convert every pub and grocer into a Pattison whisky customer. Within a short period of time, Pattison boasted over 150 salesmen, many more than their much bigger and more established rival, the Distillers Company, Ltd, or DCL. 

DCL was also growing but they were taking a more measured approach, buying up distilleries but controlling the flow and production of whisky so that demand could be met without getting caught up in the mania.

But while the DCL was watering their crops with a fine mist, Pattison was using a firehose. 

It was all about image. Image, image, image. Their sales staff loaded down their pubs and grocers with every type of branded material they could find. Glassware, mirrors, ornate dispensers, cycling maps, anything they could stick the name Pattison on, they would do it.

And with the money flowing in, by the mid-1890s Walter had decided it was time to start making their own whisky. He bought half of the family-owned Glenfarclas Distillery, as well as Oban and Aultmore. He even bought a brewery. 

But this wasn’t enough of a display of success for Robert, they also went about building a lavish marble-clad office building in Leith, just north of Edinburgh. It was so impressive that even their main rival William Ross, later said: “Their extravagance in conducting business, including the somewhat palatial premises they erected, was the talk of the trade.”

And this is just what Robert was seeking to do. Not only impress his investors but also, put a chill into his competition. The spending continued. Palatial estates were bought in Clovenfords and Peebles. And Robert, seeking to gain more notoriety for his opulence would purposefully miss his train to Edinburgh, then have someone ring up the press to let them know he was hiring a private train to take him into town. A train that cost £5 1 shilling per mile to ride. Clovenfords is 31 miles from Edinburgh, while Peebles is 22 miles away. Basically, he was spending around £5,000 or $6,400 in today’s money for a one way ticket to Edinburgh.

The public ate it up. The talk around town would always inevitably turn to talk of those boys at Pattison. It wasn’t that they were necessarily loved or admired, it was more the marvel and spectacle of the whole affair. 

And the brothers continually fed the machine. They tapped into the patriotic spirit of the people through advertising - liberally using images of British army rolling into battle with taglines like “Victorious all along the line” and “Pattison’s comes to the front.” They also claimed their whisky didn’t cause headaches, and that it was “acknowledged to be perfection by all impartial men.” The King of Whiskies, they claimed. 

If you picked up any news print between 1897 and 1898, there was likely to be an advertisement for Pattison’s somewhere in it. They went from spending £20,000 to £60,000 in promotion in just that one year.

But their most memorable and comical promotion came when they purchased 500 African Grey Parrots and gave them as gifts to pubs and grocers. To the amazement of the clerks and proprietors, these birds had been taught to say “buy Pattison’s whisky.”

Bankers and investors were so dazzled, they just kept pouring more and more money into the venture. The brothers showered them in extravagance, inviting them upon their brand new yacht The Glenfarclas and drowning them in food, libations, and entertainment. And while none of this seemed real, the Pattison’s were reporting record profits by the summer of 1898. And investors felt they were doing quite well when the company announced large dividends.

But then something broke. Just a couple months earlier, a century old blending house J&G Stewart went into liquidation. But the brand survived after being scooped up by the Distillers Company. So no one seemed to pay it attention.

Yet this was just a small deflating before the inevitable pop of the whisky bubble. All of those investments in whisky, all of that massive production, all of that industry growth had far exceeded the demand for whisky and prices began to fall dramatically. Stores of whisky in Scotland had grown from 2 million gallons in 1892 to well over 13 million gallons just 6 years later. 

Soon, the parlor tricks were no longer working for the Pattison brothers. Bills were coming due and they could no longer rob Peter to pay Paul. And it all happened so fast. Within the first couple days of December, the Distillers Company, who had been providing credit to Pattison's, froze their account when they hit £30,000 in debt. 

Fear began to spread and Pattison's stock fell 55%. When news came that Clydesdale Bank had turned down the brother’s emergency loan request, the company went into liquidation. 

Once the mighty firm had fallen, the scope of mismanagement and greed reared its ugly head almost immediately.

To pay their fat dividends, which mostly ended up in the brother’s pockets, they would dip into new investors' money and working capital - the basics of a Ponzi scheme. 

They would sell their stocks of whisky only to buy them back at a higher price to try to artificially inflate market prices and thus increase future profits. 

But to the scotch whisky lover, the most deplorable thing they did was to take poor quality grain spirits they had acquired from Ireland for literally 5 pence per gallon, tossed in a quart of malt whisky and advertise it as “fine old Glenlivet” the most prized scotch from the Highlands and sell it for 42 pence per gallon. The actual value was closer to 11 pence. This act alone added £27,000 to the bottom line and helped keep investors comforted with dreams of future success.

On April 8, 1901, the two brothers were arrested and charged with fraud and embezzlement. It seems that in addition to all of their other sins, Walter had also taken a £30,000 loan for the business from Clydesdale Bank and put it straight into his own pocket. But this wasn’t the worst of it. After going through the books, it appeared that £500,000 could not be accounted for. That is over £15.5 million in today’s money. The government quickly put together its case and by July 10th the brothers were in court.

The jury only took minutes to convict the two brothers - Robert on all four counts and Walter on two. Robert fought for his brother, suggesting he was innocent of those two counts, but the judge was having none of it.

Robert was sentenced to 18 months in prison and Walter 9 months. As for the investors, the most they received back about 40% of their original investment. 

But it was the collateral damage that is somewhat hard to gauge. The crash was likely to happen with or without the brothers, but the Pattison Crash definitely helped speed up the process.

Nine major businesses failed and many of the small suppliers didn’t survive the fallout. Whisky became a cheap commodity and with the completion of Glen Elgin in 1900, not another distillery would be built in Scotland for almost 50 years. And Glen Elgin wouldn’t survive for more than a few months before being shut down.

Ironically, the Pattison’s biggest rival the Distillers Company was the biggest winner out of the whole scheme. Properties that would have cost them three or four times as much to build came to them at bargain rate prices as the liquidation of the Leith blender commenced. DCL would continue their consolidation of the industry for years and for a country that had over 150 distilleries at the beginning of the 1900 went down to a tenth of that by the early 1930s. By 1925 rivals Dewar’s, Buchanan’s and Johnnie Walker were all owned by the DCL. It wouldn’t be until 1998 when Guinness and Diageo decided to sell Dewar’s to Bacardi that Walker and Dewar’s would again become direct competitors.  

For their parts, upon leaving prison, both Robert and Walter were defeated and went into bankruptcy. Walter died in London 1908, Robert's fate is unknown.

Upon reflecting on the Pattison Crash, DCL Chairman William Ross said, ‘...so large were their transactions and so wide their ramifications that they infused into the trade a reckless disregard of the most elementary rules of sound business… Investors and speculators of the worst kind were drawn into the vortex and vied with each other in their race for riches.”

A sad chapter that you would think humanity would learn from. But 520% Miller and his investors didn’t learn it. 20 years later in the same city, Ponzi and his victims didn’t learn it. There is a program on CNBC called American Greed that has had no trouble filling up 13 seasons with stories of people like Bernie Madoff and investors who have their own greedy instincts tickled in the quest for a quick buck. 

It’s hard to understand how it keeps happening. But one thing’s for sure, those bubbles will keep forming and booms and busts will be inevitable, as long as there is a dream to be had, a thirst to be quenched, and someone crafty enough to make the dream seem real. 

Whiskey Lore is a production of Travel Fuels Life

Research, stories and production by Drew Hannush

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