Cornering gold

The date September 24th, 1869, is known as Black Friday because of the panic caused in New York by two unscrupulous speculators, James Fisk and Jay Gould. They tried to corner the gold market on the New York Gold Exchange, and would have succeeded but for the personal intervention of President Ulysses S. Grant. Grant's post-Civil War policy was to pay down the national debt and stabilize the dollar by selling Treasury gold at weekly intervals.

The schemers behind the so-called Gold Ring established personal contact with Grant, and used it to persuade the President that selling gold was bad for farmers. As a result, the sales (which kept down the price of gold) were suspended. Fisk and Gould began buying gold at Gould’s New York Gold Room. The price rose rapidly, making huge paper profits for the Gold Ring, it accelerated as others bought in to gain from the seemingly irresistible price rises. Fisk and Gould were on the point of cornering the market in gold when President Grant realized what was happening and ordered the release of $4 million in gold on Friday 24th. The move drove down the price and stopped the Gold Ring’s attempt to corner the market.

There was panic on Wall Street as hundreds were ruined, unable to meet the obligations they had speculatively entered into. Share prices dropped 20% within a week, and the US went through months of economic turmoil. It bankrupted dozens of trading firms and hit farmers, who were 50% of the workforce, hardest of all. Wheat prices dropped by half, corn prices by a third, with steep falls for other cereals. Export goods could not be shipped amid the financial chaos. There were runs on banks, and economic decline in whole sectors, though the President’s action is reckoned to have averted what could have triggered a nationwide depression.

Fisk and Gould bought expensive lawyers and narrowly escaped prosecution. They had in fact engaged in bribery of the Assistant Secretary to the Treasury, and the attempted bribery of the President himself. Fisk’s career was documented in W A Swanberg’s biography, “Jim Fisk: The Career of an Improbable Rascal,” and in the 1937 movie The Toast of New York. The man himself was shot dead by a love rival in full public view in a hotel lobby.

Sone critics of free market capitalism claim that this is what capitalism is all about: swindling and speculation at the expense of honest labour. But the truth is that Fisk and Gould were an aberration. They abused a system, using loopholes in the rules to do so. Free market capitalism is not the same as laissez-faire, in that it requires intervention to ensure fair play. When parties try to acquire monopoly powers, or to use other methods to gain greater rewards than they would obtain in a fair and honest market, the behaviour is referred to as “rent-seeking.” It is perhaps an unfortunate term, because it has nothing to do with the price you pay to rent a car or a home. Instead it is a technical usage, and far from being part of free market capitalism, it is used to describe behaviour that seeks to thwart free markets via monopolistic or regulatory seizure.

When this happens, governments usually step in with new laws and regulations to close the loopholes that were used. Although they are normally one move behind, each abuse makes the system stronger in one sense because it exposes the flaw in the system and allows government to remove it. The behaviour of Fisk and Gould would not even get started under the current rules that regulate behaviour in financial and commodity markets. Free market capitalism adapts and changes. True, there are some who try to abuse it, but fortunately there are financial journalists and investigative bodies on the watch for such abuse, and who can urge the adoption of practices to curtail it.