The Failed Gold Corner (1869)
This corner is very different from what I have taught you so far, because it deals with a major commodity — gold. To understand this corner, here is the relationship of gold to money in a nutshell. Money used to be financially guaranteed by gold through the gold standard. The advantages of the gold standard were that it imposed a common standard of value for all currencies and imposed economic discipline on countries. This meant that countries would horde gold and only a limited amount was allowed to float for industrial purposes, like jewelry. But the gold standard caused as many problems as it solved. Nations could not protect their industries from foreign competition through import or export restrictions, the growth of a nation’s money supply was restricted by its gold stock, and governments were limited in their ability to respond to economic crisis such as rapid unemployment.
Remember that this was the time that the problem of trading goods and services with other companies issuing different currencies was solved by using gold as an international standard of value. During the 17th and 18th centuries, major trading nations in Western Europe made their currencies freely convertible into gold. Gold bullion could be exported and imported from one country to another without significant restriction, and each unit of currency was defined in terms of grains of fine gold. Nations adopting the gold standard agreed to exchange paper money or coins for gold bullion in unlimited amounts at predetermined prices. Gold was too heavy to transport, so this system had its own problems.
The Gold Exchange Standard
The gold exchange standard adopted in the 1800’s allowed a country’s currency to be directly converted into foreign currencies. The economic chaos of the worldwide Great Depression in the 1930’s caused the gold exchange standard to collapse and the modified exchange standard known as the Bretton Woods System was developed under the control of an international lender of last resort called the International Monetary Fund (IMF) that linked all world currencies to gold and the U.S. Dollar. Foreign governments and investors began to lose confidence in the ability of U.S. policymakers to control the U.S. economy and inflation in the 1960’s, and this resulted in the collapse of the Bretton Woods System.
In 1971, President Richard Nixon finally dismantled the failing Bretton Woods System and the world adopted the managed floating currency standard. Today, all world monies are fiat currencies, which means a country’s coins and paper are not backed by a commodity like gold. When you stop and think about the fact that all money is a universal mechanism of exchange of goods and services, it never really made any sense at all to back a currency with a commodity like gold or silver.
In 1868, the federal government held around $75 million in gold reserves and the whole floating gold supply was about $20 million. Jay Gould knew that if he could buy up the float, the gold price would soar to where he could sell it at a high price. Gould conspired with Abel Corbin, the brother-in-law of President Grant, to influence the government’s policy on gold. Abel continually lobbied Grant to influence government policy on gold — a sensitive subject, because gold also anchored the U.S. dollar’s value at the time. The flaw of the gold standard and Bretton Woods System was that politicians failed to recognize that money is nothing more than a common medium of exchange of goods and services and, as such, does not and should not have any inherent value in itself.
For a while, it looked like Grant was going to go for it and Gould bought $50 million in gold, driving the price up from $130 to $137 per ounce. Gould then set out on an aggressive lobbying campaign of government officials, but they began to suspect he was trying to corner the market. Gould got a bad feeling that the federal government was on to him and might try to break his corner.
The Monster of High Society was a Gentleman at Home
What Gould did next is typical behavior for him and the reason his family was never invited to high society parties despite his great wealth — I know Gould seems like a monster and in the financial markets, he was — but at the same time he was a very loving husband and father. Cornelius Vanderbilt was loved by society but was an oppressive father. He was a monster of a family man and when he tired of his wife he put her in a lunatic asylum. Members of Vanderbilt’s own family charged that he did it to make way for some other woman.
Gould secretly began selling gold while he convinced his friends to buy at any price. On October 4, 1869, the feverish purchases of Gould’s friends had pushed the gold price from $140 to $160 per ounce. This was recorded as a Black Friday, because hundreds of firms on Wall Street were driven into bankruptcy by the huge price swing. The price quickly subsided as short interest poured into the market.
The flood of sell orders drove the price of gold back down. See Note.
The important lesson here is that a commodity is widely consumed by the public and monitored heavily by governments. This makes the manipulation of a commodity market much harder to pull off. For instance, there are less than 50 major futures commodity markets, but there are more than 16,000 stocks trading in North America. It is a lot easier for manipulators to pump up the price of a stock and dump it on the public, because there are fewer people paying attention to a specific stock because there are just so many of them around.
– Doc Brown
BIO: Doc Brown is a national expert on the stock market. His courses “How to Make a Million Dollar Portfolio from Scratch” at the Oxford Club is a national bestseller. Dr. Brown’s research appears in some of the most prestigious academic journals in the field of finance. See Journal of Financial Research and Financial Management. Scott is an associate professor of finance in the Graduate School of Business at the University of Puerto Rico.
NOTE: Flynn, J., ‘‘Men of Wealth’, Simon and Schuster, 1941, P. 179, 186.
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