The Gold Pool

Alan Greenspan was no stranger to the tales of the great manipulative cliques in the gold market of past years, or "gold pools" as they were often called. Even though federal regulations had long since made it illegal for any group of speculators to operate in organized groups or pools, he knew it was still very much a common practice, particularly within those trading groups organized within the Federal Reserve System. Foremost among these pools were those operated by the Fed Financial Affairs Committee, known as the "FACE."

Greenspan's mind swirled at the thought of the task to which he had been assigned: oversee the manipulation of the gold market down to $400/oz. He knew this campaign would be a long, arduous, painstaking task. He knew further that many thousands of traders and investors would be financially crushed along the way, many of them irreparably.

Greenspan's mind flashed back to the oft-repeated insider's tale about the infamous "Erie clique" of the late 1800s. At that time, shortly after the Civil War had ended, the leading figures in the banking and money scene were more often than not caught in the middle of some conspiracy to manipulate some commodity, security, or anything that could be manipulated. The leading members of this notorious group-the "FACE" of its day-included Jay Gould, president of the Erie Railway, at that time the biggest rail line in the country; James Fisk Jr., comptroller of the same; and Frederic Lane and Henry Smith, directors of the same. Also involved in the Erie pool to manipulate the gold and stock market of that day and time were representatives of the N.M. Rothschild banking house in London and another very large banking concern in Vienna. In those days, every notorious financial scandal and conspiracy to manipulate markets usually had its origin in some European banking house. And N.M. Rothschild was usually the culprit.

Of this Greenspan was fully aware; in fact, whenever he thought on this he usually found himself repeating the line, "The more things change, the more they stay the same."

In the days immediately following the Civil War, gold commonly traded anywhere between $120 and $140 per ounce. The country had just emerged from the horrors of war and most people were expecting a deflationary crisis to emerge after experiencing a prolonged period of inflation due to a war-time economy. After three or four years time, however, the collapse never materialized and people then assumed the coast was clear to begin speculating again. At that point the door was swung wide open for a notable advance in all sorts of prices-stocks, commodities (chiefly cotton and wheat), even real estate. What almost no one was expecting was a decline or destabilization of the currency or an inability of the government to meet its monetary obligations. Therefore, most investors and speculators were betting on a decline in the price of gold.

Since there was so much bearishness among the trading public with respect to gold prices, it was only natural that many thousands taking huge bets that the price of gold would drop. Some were even so daring as to expect a drop all the way down to $100/oz., and made their trades accordingly. A huge "short interest" arose on the gold exchange, which meant that speculators who were bearish on gold had borrowed gold they didn't actually own with expectations of buying the gold at a much lower price when and if the price dropped. Of course, if the price didn't actually drop it would mean certain disaster for a great many traders. Needless to say, the short interest on the gold exchange had risen to a level not seen in many decades, and it seemed as if the entire country was counting on a massive drop in the price of gold. This is when the Erie clique decided to make its move.

At the time the Erie clique began to operate with vigor in the U.S. gold market, the supply of coin was not over $20 million, and was probably less. The government held from $90 to $95 million, about $20 million of which were a special despot represented by gold certificates that were afloat in the banks and in the hands of the people. Deducting these 20 from 95, there were $75 million as the amount of gold actually owned by the government. The Erie clique knew, therefore, how much gold they would have to buy on the open market in order to control prices in their favor.

The conspirators began buy purchasing $20 million in gold from the available floating supply. As soon as this amount was bought the conspirators were masters of the situation and held a monopoly over the gold market. In their own words, "They held the market in the palm of their hand." Every merchant who required gold to pay duties, and every speculator who had sold gold for future delivery would be compelled to come to them to buy. The fact that there were an unusually large number of traders who were willing to operate on the "bear side" was the golden goose the conspirators hoped to pluck. It was nothing to them that in the course of their operation the credit of the country would be gravely impaired, and thousands of merchants would inevitably be ruined. Considerations of the public welfare commanded little respect in the halls of the Erie clique; and as to the merchants, it was their business to take care of themselves.

Gold had sold at $129.50 on the presidential inauguration of Ulysses Grant in 1869. The campaign of the Erie gold pool was opened around the middle of September of that year. Jay Gould, the leader of the Erie clique, called a meeting of the pool at his offices one morning at that time. One of them proposed that they should buy a few million dollars worth of gold. Millions to those men were as mere hundreds to ordinary mortals. The others assented. And each agreeing to take three million, the veteran operator of the group, disdaining concealment, went in person to the Gold Room of the New York Stock Exchange, where gold contracts were bought and sold, and bought nine million dollars worth of gold at $133-$134. It seems probable that this purchase, added to what the clique had previously bought, made them possessors of all the actual gold in New York outside of the Sub-treasury. The situation, however, was so little understood by the public that the sellers were as confident as ever, and the clique experienced no difficulty in buying from one to two or three millions more each day.

In the gold market of that day there was what was called the Loan Department of the gold exchange in New York. In that part of the exchange, parties who had gold to lend, that is to say, exchange it for its market value in currency with persons who require it for duties or for delivery, at rates which vary according to the condition of the money market and the short interest. When money was very tight, holders of gold had to pay usurious rates to get currency in exchange for their coin. When everybody believed that gold was going down and the short interest was large, holders of coin were often able to obtain a bonus for its use. By lending out the gold they had bought at the current rates, the clique was enabled to gradually accumulate much more gold than could have been delivered by the bears in one day had they been called on for it, and this without attracting any attention.

The market, however, was sure to feel the effects of such steady purchases before long. Within a day or two after the purchase of nine millions at $134, gold was selling at $138. On the morning of September 22, 1869, the clique probably owned several millions more gold than there was in the city outside of the Sub-treasury. This gold was partly loaned to the bears, and partly "carried" by banks and bankers for the clique on margins.

Later that day, a caucus meeting of the clique took place in the back offices of William Heath and Co., on Broad Street. The purpose of the meeting was to put the price of gold up to $200 or higher, if only they could "carry" their gold without lending it, and so compel the shorts to buy in. But, on the other hand, the premium was so absurdly high that it made one dizzy to think of having to find a market for $20 or $30 million. On either side ruin for someone was inevitable.

On September 23, the clique began operating in earnest. Gould had a host of brokers buying gold for him. To his own clerk, who represented him the Gold Room, he gave the Napoleonic order: "Put gold up to $144, and keep it there." His clerk proceeded to buy $7 million in the execution of this order. Altogether, Gould must have purchased, directly or indirectly that day, not much less than $20 million worth of gold. The price opened at $141 and closed at $143.

The most astounding feature of these immense operations is that they were probably achieved without the outlay of one single dollar-virtually all of it was undertaken through enormous borrowings. That this was possible was due to the facilities afforded by the Gold Exchange Bank, and to the custom of lending gold. It would appear that Gould not only lent all the gold he could himself, but whenever he gave a broker an order to buy, he likewise requested him to lend the gold in his own name. As gold was constantly rising, the lenders were never out of pocket a single dollar.

On the evening of Thursday, Sept. 23, another meeting of the conspirators took place. At that meeting it was suggested that difficulties would necessarily occur in the Clearinghouse, and that it was highly improbable that the bank would attempt twice to clear so enormous a transaction as that of today's. It was judged necessary that the manipulation campaign should culminate on the following day. How to effect the culmination was the question at hand. The clique owned and held contracts for a very large amount of gold-nearly $110,000,000. The short interest alone on the market for gold was $250,000,000. The total amount of gold fell short of $25,000,000. Whatever was the difference between $25,000,000 and the aggregate net purchases of the clique represented the uncovered short interest, which, in the even of a corner, would have to be settled at the dictation of the clique and under any terms they cared to dictate.

It had been decided by the clique that the following day the operation should culminate, and that gold would be put up to $200. "This will be the last day of many a gold trader," Gould told fellow members of the pool.

The next morning, on Sept. 24, gold was put up sharply. This was done by a broker acting on the orders of Gould and company. Gold opened at $143 at about 9:15 a.m. The broker was ordered by Fisk and Gould to bid it up to $145, then to $150, then to $155, and finally to $160. It reached the latter figure before 11 a.m. At about the same time a number of brokers were directed to confer privately with the shorts, to advise them earnestly to settle with the clique, and to threaten them, in the even they did not settle, that gold would be put up to $200 before the close of trading that day. Needless to say, it didn't take much convincing to get the hoards of "shorts" to settle on the terms of the clique.

Settlement once established as the order of the day, there was no longer any motive for putting gold up, and Gould sent into the Gold Room of the exchange half a dozen brokers with orders to sell all the gold they could. Needless to say, the day was one of wild excitement. The gold ticker in many board rooms and offices to record gold price fluctuations ceased to be of any use. It worked only a fraction of the time, so large were the transactions being made that day, and the capacity of the tickers so inadequate to register such a large volume. The ticker took so long to indicate an advance of just one percent, that, though it was incessantly in motion, it was never quite correct. Gold was jumping about two or three percent a minute. The Gold Room was thronged. Every importing merchant was vitally interested in the movement; no one could sit still in his office. Each entrance to the Gold Room was blocked with masses of excited and angry men; it needed some perseverance and some muscle to work one's way through the press. On the brokers' faces every variety of expression was depicted. Here was a jubilant group, evidently people who had expected to be ruined by the advance in gold, and who were now saved by its precipitate fall; and here were knights of rueful countenance, people who had been frightened and had bought it during the rise. Among the older and more experienced brokers, grave apprehensions for the future were mingled with indignation at the infamous conspiracy. It was already evident that the crisis must lead to numerous failures, and for very large amounts; no one could tell, in fact, where the catastrophe would end.

It was said that the government broke the corner by selling five million in gold; however, this was not the case. The corner collapsed of necessity from the instant the shorts went "in a rush" to Smith, Gould, and Martin's office to settle. If the government had not sold a single dollar, the result would have been the same.

In the mean time all was confusion at the Gold Exchange Bank. This institution was the clearing house for the gold brokers of the country. The transactions in gold on that fateful day of Sept. 24, 1869, had been so enormous that the balances in gold and currency were unprecedentedly large. Some five or six millions of certified checks had been paid into the bank that morning, and seven or eight million in gold. Money was scarce at that time; the nation's banks were hard pressed. This sudden and unexpected withdrawal of so large an amount of money from circulation led to one of the worst panics Wall Street had ever seen at that time.

Its severity may be imagined when it is stated that money was loaned at 250 percent, per annum, and that stocks fell from 20 to 50 percent in a single day. New York Central, a leading stock of that day and time, which had been selling at $215 or $218, fell to $145, to take one prominent example. Several of the largest banking houses in the country were compelled to suspend payments; and of those which outlived the storm, quite a large number lost all they had.

All of this was the work of the gold conspirators. They alone, of all the people in the market, had made money out of the general desolation.

Finally, the last stroke in this great conspiracy was given by the Erie clique. The Gold Exchange and the Stock Exchange were enjoined from using their machinery to enforce fulfillment of the contracts of Sept. 24, 1869, and the Gold Exchange Bank, on the affidavit of one of the confidential brokers of the Erie clique, was thrown into the hands of a receiver.

A chill went up Greenspan's spine whenever he recounted the operations of the Erie gold pool and the fateful consequences of their scheme. Now, nearly 120 years later, it was his turn to re-enact the events of that infamous page in America's financial history, only with a different twist: he was to manipulate the price of gold downward instead of upward. With such a long and sordid history before him, and with the events of October 19, 1987, still fresh on his mind, he could only dream as to what the outcome of this conspiracy would be. The intrigue, he knew, had only just begun.