The First Black Friday

If you got slammed by gold’s sudden drop over the past couple of days, take comfort in the fact that things have been worse. Much worse.

In 1869, Ulysses Grant was in the White House. The government was struggling with massive domestic debt, incurred by four years of civil war and subsequent efforts at Southern reconstruction. To raise money for these expenditures, the Treasury had issued vast quantities of “greenbacks” (paper currency), which Grant promised to redeem for gold as soon as was practical. This he then proceeded to do: over the course of some six months at the start of his administration, the government paid out its gold reserves little by little, thus easing the debt while keeping the price of the precious metal under tight control. If the government wanted the price of gold to go down, it released more of its holdings; if it wanted it to go up, it paid out less.

Enter two unscrupulous speculators, Jay Gould and James Fisk. Their scheme was to corner the gold market by means of insider information. They reasoned that if they could find out beforehand exactly what the Treasury was planning to do as regards the gold supply, they would be able to buy up the yellow metal when the price was low and then sell when it was high. This would not only net them huge profits but also drive up the rate of traffic by wheat farmers on the Erie Railroad, of which Gould was president. Both men were well versed in incestuous economic dealings; both were very much in league with Boss Tweed’s Tammany Hall, and Gould would later post bond when Tweed was indicted.

But to pull it all off, they needed a hook. This was provided in the form of Abel Corbin, Grant’s brother-in-law. It’s not clear whether Corbin fully knew what the pair was up to, but he nonetheless served as their point of entry to the Oval Office, where they tried to persuade Grant to tip his hand regarding the government’s gold policy. This Grant, to his credit, refused to do. But Gould and Fisk now seemed, in the eyes of the financial community, to have the president’s ear. Thus when they started buying up large quantities of gold in early September 1869, prices spiked.

The one to put a stop to these shenanigans was George Boutwell, Grant’s Secretary of the Treasury. Honest and intelligent, he quickly saw through Fisk and Gould’s scam and approved the sale of $4 million worth of government gold to lower prices. Grant, too, realized what was up and told his brother-in-law to cut ties with his sketchy partners. But thieves’ honor prevailed, and Corbin tipped off Gould, who then was able to sell off his gold before the market crashed. Fisk, too, escaped serious economic damage, even though Gould omitted to tell him the news. The only one screwed was Corbin—together with grain farmers (whose prices fell 50%), stockholders (the market lost 20% in a single week), and countless ordinary Americans (who found themselves out of work in the ensuing economic turmoil). On Black Friday, September 24, 1869, gold prices went from a high of $162 to a low of $133 in a matter of hours.

What became of Gould and Fisk? Neither was prosecuted, thanks to a good lawyer and support from Tammany Hall. Gould went on to a glorious career as a railroad and communications magnate; Fisk was shot dead in an argument over a prostitute a few years later. As for Grant, his name was permanently besmirched: the years of his administration were branded ¨The Era of Good Stealings.¨

Posted by Eddy Elfenbein on April 16th, 2013 at 12:48 pm

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