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In 1869,
Jim Fisk and Jay Gould tried to corner the gold market, and for a time, this
notorious duo succeeded. It is a fascinating story that is relevant to what
is happening in the gold market today.
At the
time, the dollar was on the Gold Standard and still defined in terms of gold
at the rate of $20.67 per ounce. However, President Lincoln had suspended
convertibility during the War Between the States, and in 1869 the ability to
redeem dollar paper money for gold had not yet been re-established.
Gold was actively quoted and traded on the New York Gold Exchange (NYGE), in
terms of ‘greenbacks’, the irredeemable, fiat currency created
during the war. Though denominated in terms of dollars, fiat currency
greenback dollars traded at a discount to sound money gold dollars (hereafter,
$’s). Prices were quoted at the NYGE in terms of how many greenback
dollars (hereafter, GB$’s) were needed to purchase $100, i.e., five
Double Eagle gold coins, which together weighed 4.838 ounces. During
the height of the war, with the prospects for the Union army and the outcome
of the war still uncertain, over GB$250 were needed
to purchase $100. With the war over, and the federal government’s
creditworthiness rising, the greenback discount began dropping. When Fisk and
Gould started their manipulations, gold hovered around GB$130.
Jay Gould
was the mastermind of the two. He understood markets, and he understood human
psychology. Having initiated and participated in many stock squeezes, he also
knew how to drive markets to a state of frenzy, and by September 1869, his
plan was well underway.
In those
pre-air conditioned days, trading often languished in the doldrums of New
York City’s hot and muggy summer. Those uncomfortable conditions often
put markets into a sleepy state, giving many a false sense of security, and
the summer of 1869 was no exception. Even though greenbacks still traded at a
big discount to gold dollars, complacency reigned supreme, and Gould knew
that the gold market was ripe for a squeeze. All he had to do was crack the
whip. And crack it he did.
Gold began
rising in mid-September, and the price rise quickened the week of September
20th. Gould got some newspapers to help him in his task by printing stories
that a gold squeeze had begun. By Thursday, gold had risen to the low
GB$140’s, but the real fireworks began the next day, September 24th,
what has become known as Black Friday.
Brokers
acting for Fisk and Gould began the day by wildly bidding up gold from its
GB$145 opening price, and those creating the corner stood to make a fortune.
Using derivatives to maximize their leverage, Fisk and Gould controlled calls
on 5.5 million ounces of gold with a face value of $110 million, an amount
equal to the US Treasury’s entire gold reserve at the time. It was
without any doubt an enormous leveraged position, and Fisk and Gould stood to
make GB$5.5 million on every GB$1 rise, and rise it did.
Panic was
spreading throughout Wall Street, as the price rose relentlessly that fateful
day. These manipulations affected every part of banking and finance. Many
faced ruin as gold began to soar, and the margin calls began to mount.
The gold
price had risen to GB$162, when James Brown (who with his brother took over
the firm started by their father, which exists to this day as Brown Brothers
Harriman) stepped up to the plate. He sold 250,000 ounces to a Fisk and Gould
broker at GB$160. Others alertly sensing a change in momentum also stepped in
on the sell side. The gold price began dropping.
Shortly
thereafter, the US Treasury announced that it was selling gold in exchange
for greenbacks. When this news hit the floor of the NYGE, the rout began.
Gold closed that day at GB$132. Its rocket-like jump and subsequent
collapse left a trail of carnage and chaos. How well did Fisk and Gould fare?
Gould never
told his partner Fisk the whole plan. To make the corner more credible, Gould
let Fisk keep buying on the way up and the way down through their regular
brokers, thereby convincing everyone on the NYGE floor that the corner was
for real and would not collapse. But without telling Fisk, Gould acting
secretly through his own private broker, sold out their entire position above
GB$150 on average and kept selling more than Fisk was buying as the price
tumbled down.
Only after
the end of trading that day did Gould share with his partner his entire plan
for the corner. Instead of facing ruin as he expected, Fisk learned the total
net gain from their combined trading was GB$12 million.
Then to
protect this hoard, Gould paid GB$2 million to two shameless attorneys to lock
up in litigation the assets of the NYGE and countless brokers, as well as to
defend the pair from the 300-plus law suits subsequently filed against them.
Some of this money also went to Boss Tweed, who through the Tammany Society
controlled New York City’s finances and politicians.
So Fisk and
Gould were left with GB$10 million to split between them - not bad for a
couple of week’s work.
Extract
from an essay published here
James Turk
Free Gold Money Report
Article originally published by the Free Gold Money Report.
James
Turk is the founder of the Free Gold Money Report and of GoldMoney.com. He is
also the co-author of The Coming Collapse of the Dollar
(www.dollarcollapse.com).. Copyright ©
by James Turk. All rights reserved.
Copyright © 2008. All rights reserved.
Edited by James Turk
This material is prepared for general circulation and may not have
regard to the particular circumstances or needs of any specific person who
reads it. The information contained in this report has been compiled from
sources believed to be reliable, but no representations or warranty, express
or implied, is made as to its accuracy, completeness or correctness. All
opinions and estimates contained in this report reflect the writer's
judgement as of the date of this report, are subject to change without notice
and are provided in good faith but without legal responsibility.
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