Last week we took you through Erie's stock crash. This week we are talking about how Gould and Corbin formed a gold trading pool to bull the price.
In the summer of 1869, Gould came to Fisk with an idea. Demand for gold always surged at harvest time. They could make money if they bought gold and then persuaded the government to let gold price rise in line with the seasonal demand rather than intervening to bring the price down.
Ulysses S. Grant, was then elected the president of USA, the first law he signed as president committed the government to redeem greenbacks in gold, at the promised rate, as soon as “practicable.” With that the banks, brokers and speculators borrowed gold and sold it short, taking the price down to $ 134 amid consensus about a further decline.
Gould became acquainted with Abel Rathbone Corbin. Corbin was a lawyer, with a willingness to do anything in order to make money. Corbin married the president’s younger sister Paine Grant and soon became the president’s brother-in-law, his confidant, and intimate advisor. I’m right behind the throne, Corbin would say.
Gould asked Corbin to help him persuade Grant to reverse course on greenbacks. If the president flipped and agreed to defy Boutwell (the treasury secretary), the gold price would soar. Corbin, like Fisk, had his doubts. Grant was stubborn and incorruptible, Corbin told Gould. He wouldn’t take bribes. Gould told him not to worry. Just get me in front of the president; Gould told Corbin and he would take care of the rest. Corbin arranged a meeting with the president. Gould described a plan he called the crop theory to the President. Consider the situation, he said.
Britain was a huge buyer of American grain. It was paid in gold. So the more expensive gold became in greenback terms, the more greenbacks and thus the more crops a Britisher importer could buy with gold. It was like tourism. Foreign travellers love a weak dollar because it reduces the price of an American vacation. Importers love a weak dollar because it reduces the price of American products. The cheaper the greenback, the more grain farmers could sell.
Grant should let market forces do the work and, rather than intervening, let seasonal demand lift the gold price. National honour could wait, Gould said. Let the farmers have their day. President Grant listened to Gould quietly, puffing his cigar. Only smoke emerged from his lips. Gould finished his speech and waited for the President’s response.
The president took the cigar from his mouth and said, “There is a certain amount of fictitiousness about the prosperity of the country.” Gould tried again to convince the President. Becoming emotional, he conjured tales of the apocalypse. Grant was wrong about the link between a weak gold price and economic stability, he told the President. If the gold price stayed weak, crops would rot in the fields and farmer’s woes would spread to the rest of the economy.
A weak gold price wouldn’t deliver the soft economic landing that Grant envisioned. It would ignite the very panic Grant feared. “It would produce a strike among the workmen, and their workshops, to a great extent, would have to be closed,” he said. “The manufacturer would have to stop”. Grant continued to blow smoke rings. Fisk piped in. “You see, General Gould isn’t entirely disinterested in this business,” he said. “He and I have got the responsibility of running the Erie railroad. We’ve got forty thousand wives to look after and we can’t do it if our sidetracks are full of empties.” Grant went to his room, after bidding them goodnight. He had not been convinced.
Gould worked other angles. The post of assistant treasury secretary was open. The sub treasurer executed the Treasury Department’s activities in New York and as such was positioned to leak market moving information. If Gould could get his own man in the post, he could get early warning of government information for gold. Gould and Corbin got General Daniel Butterfield.
Butterfield had been awarded the medal of honour for leading at Fredericksburg. Grant appointed him sub-treasurer on Corbin’s recommendation. Gould went to Butterfield’s new office two days after the appointment and put him on a retainer with a check for $10,000. That was $2000 more than Butterfield’s government salary.
Gold was the talk that summer. Everyone wanted to know if President Grant and his treasury secretary Boutwell planned to release more gold. Grant was wary of Gould, but he assumed Corbin had good intentions. As they travelled over the Appalachians together, Corbin said something that clicked with Grant. Corbin said, the gold question wasn’t just about the economy and national honour, nor was it just about farmers and bankers. No, there was something else. The gold price was about America’s place in the world. Russia also depended on grain exports, Corbin reminded the president. If American farmers didn’t get the business, the Russians would benefit at the expense of America. Is that what Grant wanted?
Corbin had done it without paying a penny in bribe. Corbin couldn’t wait to tell Gould. Gould was thrilled. All that strategizing and lobbying had paid off. Fisk wasn’t too convinced of the gold trade and preferred to stay away. Gould meanwhile found two other traders to join him in a pool to bull the price. Together they bought $9 million worth of gold at $132, giving them more than half the privately held gold in New York. It only cost them $500,000 because instead of buying physical gold they bought future contracts.
In order to lift the price of gold, Gould tried another trick. The administration often telegraphed policy by submitting unsigned articles to the New York Times, which was then the most influential newspaper in the country. If Gould could place a bullish article on gold in the paper and make it look like it came from President Grant, gold would rally.
With Corbin’s help, Gould wrote something and attached a headline: “Grant’s Financial Policy.” Gould took it to an acquaintance who knew John Bigelow, the editor of the Times. On August 25, 1869, the Times made the article a lead editorial. The piece flatly stated that the government would stay out of the gold market. “The President will not withdraw currency from the channels of trade and commerce; he will not send gold into the markets and sell it for currency,” it said.
When trading opened the next morning gold was up $2. President Grant got back to Corbin and told him that he was convinced with his idea that he had proposed. When Corbin relayed this information to Gould, it removed all doubt Gould had about investment. Being on the long side of gold was the right place to be. He and his partners doubled down, and they bought more gold.
Next, Gould went to solidify his relationship with sub treasurer Butterfield, the no.2 official in the treasury department. He went to meet Butterfield and said “I will buy some gold for you,” Gould said. He promised to open an account for Butterfield with $1.5 million worth of gold certificates. If Gould made money, Butterfield would make money. Gould in return was expecting what Butterfield had already committed, that is, warn Gould if the government planned to sell gold.
Gould stepped up his gold purchase and gold moved from $4 to $138, in the meantime Gould’s fellow pool members, with short sellers gunning for them, took their profits. “These fellows deserted me like rats from a ship,” Gould would state later.
Gould was visiting Corbin every evening to make sure all was well. One day he instructed Corbin to dash off a letter to Grant, repeat the arguments in favour of gold, to check what Grant said in reply. Sending the letter was Gould’s first mistake. It alerted president Grant to Corbin’s interest. The second mistake was reading too much into the messenger’s telegram.
That Monday, Gould bought more gold thinking the president was on his side. Those who feared missing out bought gold and volumes climbed. Gould kept on buying gold for the next two days and the story became the talk of the town with every news daily talking about gold. In the afternoon, a slew of short sellers came out on gold. Foremost was Jay Cooke who was the most powerful investment banker in the country. When banks and insurance companies refused to buy US treasury bonds during the war, he and his firm, Jay Cooke and Co saved the effort and gained president Grant’s everlasting gratitude.
Cooke shorted gold with confidence. His gold broker Harris Fahnestock told Cooke that Boutwell, the treasury secretary, was on their side, and that he’d buy bonds with gold, thus releasing gold in the market to keep gold prices in check. The broker said Boutwell was committed unequivocally to bond purchasing.
Another bear was James Brown. Brown was one of the most respected figures on Wall Street. He was seventy-eight at the time. Brown refused to believe the rumours that Grant sided with the farmers, let alone the incredible notion that President Grant had been bought. Experience told him treasury secretary Boutwell would intervene rather than wait.
Brown proposed a risky plan to smash the price of gold and along the way make a pile of money. He proposed to his fellow bears that they should keep selling gold short and make the longs feel so exposed that, rather than risk ruin, they would hail out of the trade. He suggested giving them all the gold that they would take, and would probably kill the bull.
The next day Brown, Cooke and others aggressively shorted gold. Gould surprised them and carried the day snapping up everything they sold. Gold closed $4 up at $141. That evening Gould went to meet Corbin who was frantically waiting to meet him. As soon as Gould arrived, Corbin hustled him upstairs to his library so his wife couldn’t hear. Grant was on them, Corbin told Gould. He didn’t know how. All he knew was that his wife, the president’s sister, had received a letter from Julia Grant, the president’s wife earlier in the day. It revealed that Grant had guessed that Corbin had a financial interest in gold. “My husband is very much annoyed by your speculations” wrote Julia Grant. “You must close them as quickly as you can!”
The news was devastating for Gould; it made it certain that the president would dump government gold on the market and crush the price. Gould was sitting on millions of dollars of gold coins and contracts to buy more. Gould hadn’t acted yet, but an order from Washington could come any time. If it came it would wipe out Gould.
Gould went to check on Corbin. Corbin was up $1,25,000 on the gold Gould had bought for him. Gould promised to close the account and, in the meantime, advance him $100,000 to keep his silence. Gould needed to sell his gold as soon as possible. But he had to do it in a way that didn’t crash the price. To do so, he decided to pump and dump because nothing attracts buyers more than a rising price and the fear of missing out. He assigned Fisk to buy just enough gold to make the price go up. Gould would dump his gold on the other buyers that Fisk lured in.
As planned Fisk started buying gold along with his associates, saying, “Gold sell it short and invite me to your funeral.” He took bets that gold would hit $200 when it was quoting at $144. With mountains of gold changing hands at big prices, Gould’s broker sold as much of Gould’s gold he could sell. Gould himself bought in small amounts. “I sold that day, and only bought enough to make the street think I was a bull,” Gould said afterward. By day’s end, $320 million of gold changed hands, a new record. But Gould, because he had to be careful not to tip his hand, managed to sell only half his holdings.
On Friday morning, September 24, 1869, Friday that would come to be called Black Friday, gold opened at $143 and shot to $150 on heavy buying. To speed things along and give Gould more cover, Fisk asked his broker to raise the bid to $155. Brown stepped up and sold him $500,000 worth, but nobody followed his lead.
Fisk asked his broker to bid gold up to $160. Fisk said, “Take all you can get at $160”. Speyers made his offer. “$160 for any part of five million,” he shouted. Brown watched the crowd, no one stepped up. Speyers raised his offer to $161, then $162. Brown was certain the end was near. He only needed to sell a bit more to force a collapse. “Sold,” Brown declared, “One million at $162”.
Over at the sub treasury, junior bankers jammed the waiting room, anxious to hear if the government said anything about gold. Butterfield announced that he had just received word from the Treasury secretary. He read it out loud, “Sell four million gold.” The government had stepped in. Once the floor traders got the news, the price had crashed from $162 to $145. Speyers was terrified. “160,” he shouted, “160!” Other traders eyed him warily and backed away.
A desperate Speyers ripped open his shirt and begged someone to shoot him. Brown grabbed Speyers and demanded that he pay him at once. He wanted $1 million for the gold he sold him at $162 and $6 million for the rest. Speyers whined that he had only done as instructed. “Speyers,” Brown told him, “I want to know who your principals are. I want names.”
Speyers led him to Fisk and Gould. “Gentlemen,” Speyers said, “this is Mr. Brown. He has demanded a margin from me; you have not given me any, and, therefore, I refer him to you.” Fisk turned his back and refused to meet Brown’s gaze. Gould, who was still civil, told Brown that he could do nothing at that moment. “If you do not make the margin tonight,” Brown warned them both, “I will have your heads.”
Those who had ridden Fisk’s coattails lost heavily. Many were ruined. Fortunes accumulated over years were wiped out. A mob formed outside the offices of the brokers, ready to lynch them. A militia unit was told to stand ready if a mob broke out. Gould managed to skip through the back door. But Fisk turned the wrong way and ran into his attackers. He was punched on the nose, a punch that drew blood. The police lined up outside saved him.
The meltdown in gold had spilled over into stocks. Share prices were crashing. Gould had succeeded in selling almost all his gold and he was solidly in the win column. But like James Brown, his wins were only on paper. The Gold Exchange had still to reconcile buy and sell orders and determine who owed what to whom. But that would take some time as there was an overwhelming volume of activity to sort out. Gould would have to wait for his pay day along with everyone else.
Henry Benedict, the then president of the exchange said $500 million worth of gold had been traded on Friday. This meant all the gold in the country had turned several times passing between buyers and sellers. Benedict complained that receipts were not worthy of name.
Since the trading was so furious that many of the names were illegible, many of numbers indecipherable, and many of receipts torn to pieces. Benedict gave up because he didn’t have the manpower to trace the transactions. Any help from banks was met with refusal.
Finally, a judge appointed Augustus Brown the receiver of Gold Exchange to sort out the dispute. Augustus Brown was a lawyer and his firm did work for Gould. Now with Gould’s own lawyer in charge of the money, Gould could count on getting his share.
(To be continued in the next column.)
American Rascal: How Jay Gould Built Wall Street’s Biggest Fortune by Greg Steinmetz, published by Simon & Schuster August 2022
Kirit Manral is a professional trader, and has been running a mentorship program in trading since 2019, with mentees from around the globe. He can be found on Twitter at @KiritManral