By Charles Geisst
One of the more audacious trading operations in Wall Street history occurred in September 1869. The “Gold Corner” as it quickly became known, involved nothing less than an attempt to force up the price of gold using the resources of the United States government in the process. The mastermind behind the operation was the equally audacious Jay Gould.
The trading operation caused havoc on Wall Street. Previous attempts at “cornering” a stock or commodity future usually involved a speculator gaining access to a large amount of the available supply of the security or commodity and then running its price up before selling at a profit. But gold was different because of the large quantity held by the government at Ft. Knox.
Jay Gould was best known for his involvement with the Erie Railroad and had already become something of a legend in Wall Street circles. He maintained vast political connections, notably with Boss Tweed and the Tammany Hall gang that controlled New York City politics. But in order to corner the gold market, his connections would have to be higher and better placed. The United States Treasury held $100 million in gold at Fort Knox that it would frequently use to stabilize the gold market. Any attempt to corner the price depended upon the Treasury remaining away from the market. If it decided to intervene, or was tipped as to Gould’s intentions, the cornering operation would come undone. What Gould needed was nothing less than the ear of a compliant Ulysses S. Grant. In order to get within shouting distance of Grant, he decided to employ the banking house of Seligman and its long standing Washington connections.
Gould started accumulating about $7 million worth of gold and forced the price to a premium of over 140%. He was joined in the operation by Jim Fisk, a colleague at Erie, and Daniel Drew, another well-known speculator and railway financier. Then with the aid of rumor he helped force the price in excess of 160%. This forced the bears, those who believed the price would not rise, to begin covering their short positions, helping the price to remain firm at slightly over 160. The terrifying prospect of losing everything forced many bankers, including Jay Cooke, the best known Wall Street figure of the day, to implore Grant to intervene in the market. They finally convinced him that the price rise was nothing more than a ploy by speculators.
The Treasury entered the market in several days, adding to the gold supply, hoping to break the corner. The price began to fall and within an hour it had fallen 30%. But the next day, the financial community was in chaos. Several large and respected Wall Street firms failed.
Gould made a killing from the cornering operation. He sold most of his gold positions at the top of the market and made an estimated $10 million for his efforts. The Seligmans joined him in the profits. For years, it has been assumed that they were tipped before the Treasury entered the market and most fingers have pointed at Grant himself. No evidence has ever surfaced that the President forewarned his old friends the Seligmans of the impending stabilization operation although he has been suspect ever since. Others involved in the stabilization operation could easily have informed him. One of Gould’s cohorts in the operation was Abel Corbin, Grant’s son-in-law. Most insiders assumed that he initially used Corbin to keep Grant from ordering an intervention. Finally, the president was persuaded to intervene by the bankers and the selling panic quickly followed. But Gould would not escape the operation totally unscathed. He had angered too many people. He had not warned his partner Fisk in time and Fisk did not profit from the operation as he and the Seligmans did. When news of the gold corner was finally made public, Gould was attacked by an angry crowd in New York and barely escaped with his life. Thereafter, he always travelled with a bodyguard, even when he took an evening walk from his home on Fifth Avenue.
The fallout on Wall Street was predictable. The stock market collapsed on 24 September 1869 and the day became known as ‘Black Friday.’ Dozens of brokers failed as a result. This proved to be particularly inauspicious for the New York Stock Exchange, which had formally changed to its current name during the Civil War. Many of the stronger bankers, including Jay Cooke, mounted rescue operations to save others who were tottering on the brink. The shake-out did nothing to enhance the reputation of the exchange which had been in the forefront of Gould’s other manipulations for some time.
Gould recognized the link between the price of gold and commodities prices. A year after the gold corner, he was called to testify before a Congressional hearing looking into the corner. When asked about the operation, Gould replied in terms that traders understood:
“I went in with a view of putting gold up. At the time, the fact was established that we had an immense harvest and that there was going to be a large surplus of breadstuffs, either to rot or be exported… I found that with gold at [a premium of one hundred] 40 or 45, Americans would supply the English market with breadstuffs; but that it would require gold to be at that price to equalize our high price labor… with gold below 40 we could not export but with gold above 45 we would get the trade.”
Arguing that he was helping exports did not necessarily convince Congress that his motives were patriotic but it clearly demonstrated that Gould was well aware of the factors that made commodities prices and precious metals move in tandem.
Charles R. Geisst is Ambassador Charles A. Gargano Professor of Finance at Manhattan College, and the author of many books, including Wall Street: A History, Collateral Damaged: The Marketing of Consumer Debt to America, and Beggar-Thy-Neighbor: A History of Usury and Debt.