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.