HOW MORGAN & ROTHSCHILDS RIGGED THE GOLD PRICE IN 1895
THE POWER OF GOLD by Peter L. Bernstein
Pgs. 272-276
The five years from the passage of the Sherman Silver Act and the Barings crisis in early 1890 to the climax of January 1895 bracketed a
series of gold-related disasters that slammed into the American economy with unparalleled magnitude and duration. The nature of both the causes and the effects of those events would reappear in identical form during the catastrophes and contagions that beset the emerging nations one hundred years later, from the Mexican crisis of 1994 to the Asian crisis of 1997-1998.
The difference between the two periods, however, was crucial. In the 1990s, the developed nations, and the United States in particular, joined with international organizations to extend generous credits that stemmed the tide and prepared the groundwork for recovery. In the 1890s, Europe watched while leaving the United States to suffer in iso-lation. Admittedly, the early 1890s were rough in Europe as well, but it was clear that the Batik of England, the Bank of France, and their counterparts across the Continent were not about to soil their coveted gold bricks by offering them in the form of credits to the untrustwor-thy Treasury of the United States.
Did the Europeans fail to recognize that perhaps the United States had become "too big to fail"? Indeed, the linkages between the two sides of the Atlantic were developing so rapidly, both financially and in terms of trade, that economic chaos in the United States could only have made matters in Europe far more dangerous than they already were. Or was it the opposite-were the Europeans too focused on the com-petitive threat from America's looming transformation into the major industrial power of the age? Whatever the motivation, we shall see in the next chapter that that particular form of short-sightedness would reappear in more than one country, with deadly consequences, in the two decades that followed the end of the First World War.
Yet the United States did not go over the brink in January 1895. Indeed, on the very last day of the month, the stock market leaped upward, the dollar suddenly started to strengthen in the foreign exchange markets, and orders to export gold were abruptly canceled. Nine million dollars of gold on ships in the harbor were unloaded Overnight.
What had happened? Lacking succor from the central banks of Europe and without any international organizations such as the International Monetary Fund, Americans had managed to concoct their own version of what would turn out to be the bailouts of the late twentieth century. They carried out the rescue operation with great skill by combining their genius for improvisation in the face of danger with their unabashed willingness to display raw power when required.
The power was deployed by none other than J. Pierpont Morgan who would bring to bear all his unique authority and prestige on both sides of the Atlantic. Ron Chernow, biographer of the House of Morgan, refers to the scheme that Morgan engineered as his "most daz-zling feat: he saved the gold standard." By lucky coincidence, President Grover Cleveland was a friend of the House of Morgan, having worked at a law firm right next door to the bank during the four years between his two presidential terms. The two were also neighbors in country homes in Princeton, New Jersey. Cleveland was the only Democrat for whom Pierpont Morgan had ever voted.
There was nothing easy or simple in what took place. In light of the distressed economic situation, popular hatred for New York bankers was more intense and widespread than ever, leaving Cleveland unable to turn to them as Secretary Carlisle had done only a year earlier. Even if the bankers had been more cooperative, there just was not enough gold in the United States to restore solvency to the Treasury. There was no choice but to turn to European financiers, and here the leadership continued to be with the Rothschilds. The Rothschilds agreed to attempt a European bond issue, and their first step was to approach the European branch of the Morgan bank in New York-J. S. Morgan & Co. J. S. Morgan, however, demurred, stipulating that they would par-ticipate only if Pierpont Morgan himself would handle the American side of the arrangements together with the Rothschild representative in New York, August Belmont, Jr.*
[*Belmont, born Schoenberg, was the only Jew whom Morgan was willing to accept on a business basis without complaint.]
Even though the outflow of gold resumed in early February, the Cabinet in Washington was adamant in their opposition to any suggestion of a bond issue that would put the government of the United States in debt to a bunch of foreign bankers. Pierpont Morgan was apoplectic. He cabled his London partners that the United States was on the brink of the abyss of financial chaos" and set off at once in a private rail-road car for Washington, taking Belmont along with him. When he was informed that there was no point in his seeing Cleveland, Morgan declared, "I have come down to see the President and I am going to stay here until I see him." He won his point. He soon joined a meeting with Cleveland, Carlisle, and the Attorney General, during the course of which a clerk came in to inform the Secretary of the Treasury that only $9 million in gold coin remained in the government's vaults. Laconic as usual, Morgan stated, "It will be all over before three o'clock." Cleveland now realized he had no choices left. "What suggestions have you to make, Mr. Morgan?" he asked.
Morgan presented an audacious scheme. He proposed to sell a Treasury bond issue of approximately $65 million to a European syndi-cate that Morgan and Rothschild would organize, payment to be made in some 3.5 million ounces of gold coin (about one hundred tons), at least half of which would be obtained in Europe. As an inducement to the European banks, the interest rate would be nearly a full percentage point higher than the New York banks had received in Carlisle's 1894 transaction.
Morgan's plan contained three critical elements. The first was in the text of the contract between the syndicate and the Treasury: "The parties of the second part, and their associates hereunder. . . as far as lies in their power, will exert all financial influence and will make all legitimate efforts to protect the Treasury of the United States against the withdrawal of gold pending complete performance of this contract." In effect, the Morgan-Rothschild syndicate was going to rig the gold market. The sec-ond element was to use their own supplies of European currencies to lend to Americans who owed money to Europeans on trade or financial trans-actions, thereby stanching the demand for conversion of dollars into gold. Finally, the syndicate bound together in this undertaking every banking house in New York City with important European connections, cutting them in on the bond issue as part of the deal.
When news of this unorthodox transaction broke, the public clan-nor was deafening against what appeared to be a sellout to the for-eign bankers. The New York World described the syndicate as "blood-sucking Jews and aliens." In Congress, William Jennings Bryan asked the clerk to read Shylock's bond from The Merchant of Venice. The President was unmoved. In his annual message of December 2, 1895, Cleveland observed that he had "never had the slightest misgiving concerning the wisdom of this arrangement."
The actual daily execution of the plan was watched with skepticism in both London and New York, but it worked. It worked in part because of the mechanics of the plan, but the market's understanding that Europe was providing that kind of support was sufficient to soothe the bankers and investors. The pound sterling, which had been commanding a price of $4.89 in New York, promptly dropped back to its par value of $4.86, facilitating the syndicate's extension of foreign exchange credits to American importers. Soon gold was arriving at the Treasury from Europe at $5 million a month; on July 8, the Treasury reserve was back up to $108 million. A virtual buying panic in American securities broke loose on all the European markets. During the spring, every outbound steamer carried piles of American stocks and bonds consigned to European houses. |
