Imagine a cabal of speculators pushing the limits of legality, or even exceeding them, intent on generating great profits for themselves in the blink of an eye. Such stories are many in the history of finance. From insider trading to market manipulation, the pressure to outperform, or even just the allure of riches, have brought infamy on many. However, the tale of Black Friday in 1869 is particularly infamous. That year, a close group of speculators attempted to corner the gold market. This scandal was particularly legendary because the men it involved were already rich and powerful and it even ensnared the President of the United States. It was also an attempt to corner the market in a commodity of substantial global importance, … gold.
The events leading to Black Friday were closely tied to the monetary changes underway during the American Civil War and its immediate aftermath. In 1862, to help pay for the war, the Union government began printing money that was not backed by either gold or silver. The mobilizing of an entire nation and the financial skittishness accompanying the Civil War would have inevitably put considerable pressure on the money supply, constricting its supply just as demand grew. However, the decision to issue these new banknotes, called ‘greenbacks’ due to their design, was motivated primarily by the seigniorage revenue they would generate. Because the government’s borrowing costs were surging just as they needed money most, capturing alternative sources of revenue was a matter of national survival.
Over the course of the Civil War, the US Congress authorized the printing of up to $450 million in greenbacks. They got the name because, unlike most banknotes of the era, they were printed on both sides and the reverse side was … you guessed it, green. Because they were not redeemable for specie, only government intervention in the precious metals market by buying and selling bullion as needed would maintain the currency’s value relative to gold.
In the midst of the Civil War, the Union government was in no position to defend the value of the greenback. Though they capped the printing of the notes, gold prices had risen relative to the paper money during the war as investors sought safe assets. Essentially, the value of the currency rose and fell depending on the Union’s military successes and failures but always traded at a discount to gold. The currency didn’t even fully recover after the war. In the years immediately following the Union’s victory, gold was trading at a 35-42% premium to the greenbacks. In the case of a 35% premium, this is to say it took $135 in greenbacks (measured by face value) to buy $100 worth of gold coins.
President Ulysses S. Grant, inaugurated in March 1869, had promised to return the US to the gold standard. Unwinding the country’s brief experiment with fiat money meant buying back greenbacks with gold. By using the Treasury’s gold reserves to repurchase the greenbacks, Grant was seeking to reduce the money supply. This would bring the currency back to its face value in gold and gradually remove the notes from circulation. This contractionary monetary policy was a continuation of a program underway since the passage of the Contraction Act of 1866. However, by then the policy was working too well; the money supply fell 20% in the three years following the Civil War, a drop large enough to cause a severe bout of deflation.
The Gold Ring
The conspirators behind the effort to corner the gold market in 1869 were none other than Jay Gould and James Fisk. Gould was an investor and railway boss who was already the president of the Erie Railroad. Fisk was Gould’s partner at the Erie Railroad and an unscrupulous businessman himself. They already counted bribery and market manipulation among their crimes. Together, Gould and Fisk were the chief organizers of the so-called “Gold Ring” who stood to profit from cornering the gold market.
Cornering a market means acquiring enough of a security or commodity to control its price. A speculator could buy up all available shares in a company, for example, and then sell only slowly at high prices to generate a profit. The bigger the market, the more financial resources are needed to corner it. Thus, cornering the gold market was quite an ambition. However, the Gold Ring’s thinking was that gold in private hands was relatively scarce. At the time, the world’s governments owned much of the precious metal. This made the private market easier to corner but such a strategy relied on governments not selling any gold.
Of course, the US government at the time was putting a lot of gold on the market in order to withdraw the greenbacks from circulation and contract the money supply. Gould and Fisk would need to convince President Grant and the Treasury to change course in order to pull off their scheme. To do this, they recruited Abel Corbin, a fellow speculator and Grant’s brother-in-law. Gould and Fisk didn’t stop there; they also tried to bribe Grant’s personal secretary and even his wife. Both were offered at least $250,000 but refused to associate themselves with the project.
Abel Corbin attempted to get Grant to end the Treasury’s policy of selling gold and also arranged for the appointment of an accomplice, Daniel Butterfield, to a post in the Treasury in New York. Butterfield would provide early warning of the government’s gold market plans to the Gold Ring. Corbin, together with Gould and Fisk, convinced Grant that a weaker greenback would support US grain exports and that halting gold sales would successfully depress the currency. Essentially, they insisted that a weaker currency would support a positive balance of trade. When crop harvests in 1869 were reported to be good and the potential for strong exports rose accordingly, Grant went along and ordered the Treasury to stop gold sales in an effort to weaken the greenback. Not only would Gould benefit from the results of this change in policy on gold prices but since Gould owned the Erie Railroad, he would benefit from crops being shipped from the Midwest to the eastern ports for export.
With monetary policy no longer a headwind, the Gold Ring began buying as much gold as they could. The greenback was already trading at a discount to the precious metal, but gold prices rose quickly on their buying. On September 24, 1869 (Black Friday), gold prices started the day at a 45% premium to the value of greenbacks but quickly spiked to a 60% premium; that is to say that it actually took $160 in greenbacks to buy $100 dollars in gold. However, that very day would see the collapse of the Gold Ring’s scheme.
The American Treasury Secretary, George Boutwell, discovered the scheme through his conversations with New York bankers. Rather than remain a bystander to the Gold Ring’s venture, he decided to act. Boutwell was worried about the effect of a declining greenback on the nation’s access to credit. Also, rising gold prices relative to the greenback lifted prices for other commodities as the greenback fell; the scheme would have negative real economic consequences. As far as he was concerned, the Gold Ring was treading on the nation’s economic and financial health, something for which he was responsible.
The day before Black Friday, Boutwell and Grant met and seeing that he had been used for others’ financial gain, Grant chose to break the Gold Ring. Abel Corbin became aware of the threats to their project through the President’s wife and he tried to convince Gould that the scheme might fall apart but Gould kept buying gold. A typographical error in Corbin’s telegram to Gould made his message unclear and suggested all was fine. Gould was finally alerted of the change in policy by a clearer message from Corbin and managed to start unwinding his position.
To put an end to the machinations, Grant ordered the sale of $4 million in gold. This was a monumental sum; the value of the entire American private market for gold was about $15-20 million before prices began surging. In fact, Gould came very close to controlling the entire market with $18 million in gold holdings. On Black Friday, just after spiking, the gold price fell sharply when news of the Treasury’s change in policy came through. They would fall all the way to $133, well below the opening price and intraday high. The consequences for the wider financial system were considerable. Collapsing gold prices caused other commodity prices to fall and the exceptional moves in these prices led to the failure of several brokerage firms.
Despite a congressional investigation and court proceedings, Gould and Fisk avoided legal punishment. Gould’s career went on; in just a few years he would gain control of the Union Pacific Railroad and would hold other substantial interests in the Western Union Telegraph Company and the Manhattan Elevated Railroad. Fisk however, died less than three years later in usual circumstances. Arguments over extortion and a Broadway showgirl named Josie Mansfield set off a feud between Fisk and a former associate named Edward Stiles Stokes; the feud ended with Stokes murdering Fisk in January 1872.
Among large illegal schemes contrived to acquire great riches by manipulating markets, the Gold Ring’s effort to corner the gold market was hardly the first, nor would it be the last. However, its megalomaniacal ambition makes it a particularly vivid illustration of the consequences of boundless greed. The reputation of the state and the economic wellbeing of a nation just emerging from civil war was endangered while little price was paid by the conspirators. Black Friday also encapsulates features of economic, financial, and political reality in the immediate post-Civil War period in American history. For these reasons alone, this egregious episode in the country’s financial history is worth some recounting.
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