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
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
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
Extract from an essay published here
Free Gold Money
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
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.