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Wall Street’s 10 Most Notorious Stock Traders
The country’s financial hub has a long history of lying, cheating, and stealing
Spring 2009 | Volume 59, Issue 1
The pool members demanded that Drew put the price of Erie up as agreed. “I sold all our Erie at a profit,” Drew told his partners, “and am now ready to divide the profits.” As Charles Francis Adams explained in a newspaper article, “The controller of the pool had actually lent the money of the pool to one of the members of the pool to enable him to buy up the stock of the pool; and having thus quietly saddled him with it, the controller proceeded to divide the profits, and calmly returned to the victim a portion of his own money as his share of the proceeds.”
In 1869 the New York Stock Exchange issued rules forbidding many of the practices Drew had pioneered. Wall Street’s Wild West days, which Drew had personified, soon ended. A few years later Drew was himself outmaneuvered in Erie stock and lost a fortune. The panic of 1873 took much of the rest, except those assets he had transferred to his son. In March 1876 he was forced into personal bankruptcy. It was a sad, if hardly undeserved, end for a man who had once been among the richest in the country.
Jay Gould was quiet, unhealthy, small, and thin (he would die of tuberculosis at the age of 56), with eyes “that freeze and fascinate.” But he combined a fierce ambition to succeed with perhaps Wall Street’s best brain ever. Born in upstate New York, he had come to Wall Street in the early 1860s, having worked as a surveyor and in the leather tanning business. By 1869 he was the president of the Erie Railway. That’s when he decided to corner gold.
In the mid-19th century, gold was the same as money: legal tender throughout the world. The value of all major currencies were figured in gold, and the British pound, then the world’s most important currency, had been on the gold standard since 1819. The United States, however, had gone off the gold standard in the Civil War when it issued about $450 million in “greenbacks” to help finance the war. This “fiat money” was money only because the government said it was, and it could not be converted into gold.
Thus there were two forms of money circulating in America: gold (in the form of coins) and greenbacks. Wall Street soon created a market, the so-called Gold Room, in which the two forms of money could be traded. Just before the Battle of Gettysburg it took nearly $280 in greenbacks to buy $100 in gold. After the end of the war, the price of greenbacks settled down to about $130 for $100 gold dollars. Speculators flocked to the Gold Room to gamble on the movement of gold, but respectable businessmen also had no option but to trade there and often be short of gold.
The reason was that foreign commerce was conducted strictly on a gold basis, and tariffs had to be paid in gold, not greenbacks. To protect themselves from losing money, merchants would short gold, knowing that if the price of gold went up, they would make up the loss when the transaction was completed; if the price went down, they made money on the short while losing it on the transaction. In either case, they were sure of a net profit.
While the amount of gold traded in the Gold Room was often $70 million or more a day, most was bought on paper-thin margins. Gould knew that the amount of actual gold available in the New York market was quite small—no more than $20 million. Cornering it long enough to squeeze the merchants who were short would be relatively easy. They couldn’t afford to risk their reputations with a default, however brief.
But there was one big if . The federal government held tons of gold in the Treasury. So a single telegram from Washington could break a corner in seconds. To make sure that didn’t happen, Gould tried to convince President Ulysses S. Grant of the need not to interfere with movements in the gold market so as not to interrupt foreign trade, especially the grain that flowed every fall to Europe. Grant, economically naive and too trusting of operators such as Gould, seemed to go along. To make sure, Gould in effect bribed two others so as to know in advance of any action on the part of the president. The first was Grant’s brother-in-law, for whom he bought $1.5 million in gold on no margin whatever. The second was Gen. Daniel Butterfield, whom Gould arranged to be appointed subtreasurer in New York. It would be the subtreasurer who would receive any orders from Washington to break a corner in gold. Gould loaned Butterfield $10,000 at no interest.
Gould and his allies began to buy gold during the summer, and by September they held many times the total floating supply. Gould’s associate, Jim Fisk, began to put his world-class histrionic talents to work, bulling the price of gold. “Gold! Gold!” he exhorted one writer, “Sell it short and invite me to your funeral.” The price began to rise inexorably. Around 130 at the end of August, it was at 136 by September 14. By Wednesday, September 19, it was at 141½, and the shorts were feeling the pressure. By the close on Thursday it was at 1433/8 and volume was huge, three times normal. Everyone knew that the next day—soon known as Black Friday—would be the climax.
By 10:30 the next morning, gold was at 150 and Wall Street was in utter bedlam. Thousands of people jammed Broad Street, outside the Gold Room: “staid businessmen, coatless, collarless, and some hatless, raged in the street, as if the inmates of a dozen lunatic asylums had been turned loose. Up the price of gold went steadily amid shouts, screams, and the wringing of hands,” reported Charles T. Harris, an eye witness, in his memoirs.
But Gould knew that the jig was up. Grant’s brother-in-law had warned him that the president knew what Gould was up to, and Gould had been quietly settling with men who were short gold all morning, while Fisk had stayed on the floor of the Gold Room, loudly bulling the price upward.