Speculating in gold against an unbacked, inflated currency is not a new phenomenon, even in the United States. While, as we all know, history doesn't repeat itself, there are some benefits to be gained by looking at what has happened in the past.
During the Civil War, the Federal government issued large quantities of unbacked legal tender notes, the so-called "greenbacks." Since there was current in those days a substantial gold coinage, there emerged a dual currency with the legal tender greenbacks trading at a discount against gold.
Depending on the fortunes of war and, later, of the post-war economy, greenbacks were traded as low as $241 paper for $100 in gold. But, with the return of prosperity in the late 1860's, greenbacks recovered and, by the spring of 1869, they were trading in New York at $131 in greenbacks to $100 in gold.
At this point, Jay Gould entered the picture. Conventional historians differ in their appraisal of Gould. Some say he had the ethics of a shark, while others say he didn't.
Gould had a modest personal fortune (normally described as "ill-gotten") and, in addition, controlled the treasury of the Erie Railroad. He also had the backing of the Tammany-controlled Tenth National Bank. With these funds he began to buy gold and soon acquired about $7 million worth. Since, in those days, the entire floating supply amounted to only about $15-20 million, Gould's holdings amounted to a sizeable portion of the outstanding stock.
It isn't clear whether Gould started with the idea of cornering the gold market, or if the thought occurred only later. (He certainly had no shortage of evil companions, such as Jim Fisk, to put these thoughts into his mind.) In any event, it soon became clear that this had become his intent.
As the spring of 1869 progressed, Gould continued to buy. A successful corner on the gold supply would involve not only buying up a controlling portion of available stocks, but also absorbing the short sales of other traders.
The most significant danger faced by Gould was the gold stocks of the U.S. Treasury, amounting to some $80 million. If these stocks were thrown on the market, Gould's attempt to cover the market would collapse.
Being as prudent as he was slippery, Gould befriended Abel R. Corbin, a brother-in-law of President Ulysses S. Grant. Gould explained to Corbin how farmers would benefit from a high gold price. He did not have to explain to Corbin who would be benefitted by the $2 million in gold bonds he had bought on margin for Corbin's account.
Through Corbin, Gould brought Grant's influence to bear on the Treasury to forestall any embarrassing gold sales. Major General Dan Butterfield was named Assistant U.S. Treasurer at New York and he, too, became converted to the cause of a high gold price. Butterfield, not being a presidential in-law, received only $1.5 million in margined gold bonds.
By the end of summer, Gould and Fisk owned twice the floating gold supply (thanks to short sales) and had to pump still more millions into the market as short sellers were convinced the corner could be broken. Gold was up to $141 in greenbacks.
On the night of September 22nd, Corbin called Gould to his home and showed him a letter from the President's wife to Mrs. Corbin warning her to stop speculating in gold. Gould persuaded Corbin to say nothing about the letter.
On the following day—the 23rd—Gould appeared at the Exchange, ostensibly as bullish as ever, but he had secretly ordered his agents to begin selling his holdings. The market closed at 144¼.
On the next day, September 24th, "Black Friday," the market opened active and the price shot up to $150, reaching a high of $164 shortly after 11:00 a.m. At 11:25 a.m., the news broke that President Grant had ordered the Treasury to sell $5 million in gold.
The market broke, wiping out scores of traders who had thought they were following Gould's lead. An angry mob of speculators stormed through the financial district looking for Gould and Fisk, who had barricaded themselves in their offices at the Opera House protected by police and Tammany thugs.
Gould, $11 million richer, returned to his chosen profession of plundering railroads. He died in 1892 with a fortune estimated at $77 million.
Those were the good old days.
Davis Keeler's Money column alternates monthly in REASON with John J. Pierce's Science Fiction column. © 1975 Davis E. Keeler.
This article originally appeared in print under the headline "Money: The Collapse of the Gold Market".