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A Dastardly Affair: The Lockup of Greenbacks

By Daniel Drew, in the late 1800s
Saturday, February 24, 2007

Today's extraordinary story is 140 years old. It's from Daniel Drew, one of the most financially successful (and ethically challenged) speculators Wall Street has ever known. It's out of the ordinary for us to do this at DailyWealth, but I hope you get a kick out of it like I do!  – Steve

From Daniel Drew, in 1868...

We now set out on a "Bear Campaign" – we three, Jay Gould, Jim Fisk, and I. Being backed by Tweed and his political crowd, it promised big returns. But it required a lot of nerve. In fact, before it was through, it raised more excitement than I had bargained for... It was the Lock-up of greenbacks.

It seemed a foolhardy thing to do – go short of stocks just at that particular time. The Government reports showed that bumper crops were to be harvested in nearly all parts of the country. A big traffic from the West to the seaboard was promised. The election of General Grant as president was almost a settled thing. Money was easy as an old shoe.
When money is easy, stocks go up, because at such times people are hopeful and Bullish. It was about the last time in the world, one would have said, to begin a Bear campaign.
But that's really just the time in which to begin it. Because the way to make money in Wall Street, if you are an insider, is to calculate on what the common people are going to do, and then go and do just the opposite.

When everybody is bullish, that is just the time when you can make the most money as a Bear, if you work it right. And we of our little clique thought we could work it right.

When money is easy, the public buys stocks, and so the prices go up. The way to big money, we calculated, would be to make money tight. Then people would sell, prices would go down, and we could cover our short contracts at a fine low figure. So we set about working it ourselves. We made a pool of money to the amount of fourteen millions. Fisk and Gould provided ten millions, and I agreed to put in four millions.  [Editor's note:  this, of course, would be hundreds of millions in today's dollars.]

The banks are required by law to keep as reserve twenty-five per cent of their deposits. As soon as their cash begins to creep down to the twenty-five per cent limit – which can almost be called the deadline – bankers begin to get the cold shivers; they tighten their rates, and if the need is urgent enough, call in their outstanding loans.

Knowing this we made our plans accordingly. We would put all of our cash into the form of deposits in the banks. Against these deposits we would write checks and get the banks to certify them. With the certified checks as collateral we would borrow greenbacks – and then withdraw them suddenly from circulation.

When our arrangements were complete, we went onto the stock market and sold shares heavily short. People thought we were fools, because of all the positive signs.

We decided that the time had come to explode our bomb. So all of a sudden, we called upon the banks for our greenbacks.

I remember well the scared look that came over the face of one banker when I made the demand. At first he didn't understand.

"Oh, yes," said he, after I had made my request; "you wish to withdraw your deposits from our bank? Of course, we can accommodate you. We shall take measures to get your account straightened up in the next few days."

"The next few days won't do," said I; "we must have it right away."

"Right away!" he said. "What do you means?"

"I mean," said I, "within the next fifteen minutes." He began to turn white.

"Do you understand that a sudden demand of this kind was altogether unlooked for, and will occasion a great deal of needless hardship? A wait on your part of only a very short time would permit us to straighten out the whole affair without injustice to our other depositors and clients."

"I'm not in business," I said, "for the benefit of your other depositors and clients. I've got to look out for number one."

He said, "I will see what help we can get from some of the other banks."

As soon as he began to communicate with the other banks, his alarm increased. Because he found that their funds were being called on in the same way as his own (we were calling in the greenbacks from our chain of banks all at once). Then he got to work in good earnest.

Because our fourteen millions (through the working of that law of a twenty-five per cent reserve), meant a contracting of the currency to four times that amount, or fifty-six millions in all [Ed. note: more than a billion dollars today].

He called a hasty council of the officers of the bank. Messengers were being sent out on the double-quick to all the stockbrokers who were customers of the bank, notifying them they were to return their borrowings to the bank at once. As each of these stockbrokers found his loans being suddenly called by the banks, he sent word in turn to his clients that they must put up the money themselves to carry their holdings of stock. Because the public, in buying shares, don't pay for them outright; they only pay a margin, say of ten per cent. The broker, therefore, has to put up the other ninety per cent, which he borrows from the banks, and charges his customers the interest.

The customers immediately sent back word to the brokers: "We haven't anywheres near the cash to pay for our stocks outright. Borrow from the banks, even though you have to pay ten per cent interest."

"But we can't get money at ten per cent," answered the brokers. "Then pay fifteen," said the customers.

"But we can't get it at fifteen," came the answer. "The rates for money have gone up to 160 per cent. There's a terrible tightening. No one was looking for it. We've got to have the cash, or we can't carry your stocks a moment longer."

"Then let the stocks go," came back the last answer from the customers;"throw them on the market, and do it before anybody else begins."

You can imagine, when a thousand people begin to sell, what a slump takes place. You see, the money market is the key to the stock market. They who control the money rate control also the stock rate.

Stocks began to tumble right and left. Many stop-loss orders were uncovered. Prices sagged point after point – thirty points in all. And every point meant one dollar in our pockets for every share we were dealing in.

People everywhere began to curse us. The air round about us three men was fire and sulphur. Men couldn't get money to carry on their business. Merchant princes, who had inherited the business from their fathers through several generations, lost now in a night.

This was the time of the year when ordinarily money would flow out to the South and West to pay the farmers for the crops, which they had been working all spring and summer to bring to harvest. But now that money couldn't flow, and so these farmers in a dozen states also began to hurl their curses at us. Many of them had been counting on the money from their crops to pay off mortgages. Some were driven from their homes, and their houses sold.

In fact, the curses got so loud after a while that I kind of got scared. I hadn't thought the thing would kick up such a rumpus. It almost looked as though our lives weren't safe. They might burn down my house over my head, or stab me on a street corner. So I got out of the thing. My shirt fits close, but my skin fits closer.

I told Gould and Fisk that I wasn't going to be with them in this lock-up deal any longer – my life was too precious. If they chose to be dare-devils and stand out against a whole country rising up in wrath against them, they could do it. But for my part I was going to make my peace with my fellow men. So I released the money I was hoarding, and was glad to be out of the thing at last...

Even though I drew out of this lockup deal, I got a good share of the blame. But this locking-up of greenbacks had netted us so fine a penny that we could afford to stand a lot of abuse.

This excerpt is from The Book of Daniel Drew. I love the old Wall Street stories, and this book has a few good ones. Drew sure was a dastardly operator. 

When you read the old books, you see that what works in speculating  – like doing the opposite of what the man on the street is doing and buying when money is easy – never changes. 

(I brought this book back into print for my paid subscribers and wrote a foreword for it. Those books are not available here, but you can get a free digital copy of the original 100-year-old book at Just type "Daniel Drew" into the search box. I recommend you start reading at Chapter 22, which is page 207 in most versions. If you want to print it out, you can hit the "download" button on the right of the screen at Google Books.

Good investing,


Market Notes

The Consumer Price Index (CPI) is the government's measure of inflation...

The Consumer Price Index (CPI) is the government's measure of inflation... but if you want to know what the true inflation rate is, you should ask the bond market.

The government issues special inflation-protected Treasury bonds called Treasury Inflation Protected Securities, or TIPS. They work just like regular Treasury bonds except that every year, your principal is adjusted for inflation as measured by the CPI. The coupon is calculated on the adjusted principal twice a year.

In other words, there is no inflation risk in these securities. Treasury bonds carry the highest credit-rating of any security on the planet... so it's fair to say TIPS are the safest investment money can buy, bar none. Because TIPS are so safe, their yields tend to be very low... typically around 2%.

By comparing the yield on TIPS bonds and regular Treasury bonds, we can see the market's estimate of inflation. In the chart below, we've subtracted the yield on the 10-year TIPS from the 10-year Treasury bond.

Notice how inflation expectations have fluctuated in a narrow channel since 2004 and are now near the bottom edge. Will the resistance hold? Or are we heading for lower inflation?

-Tom Dyson

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