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Home , Black Friday (1869), Black Monday (1894), Black Monday (2011), Canal Mania, Chaotic bubble, Economic bubble

An extract from

PART III

WINTON EXTRACT BOOK III.indd 1 16/10/2015 12:42 WINTON EXTRACT BOOK III.indd 2 16/10/2015 12:42 PART III

WINTON EXTRACT BOOK III.indd 3 16/10/2015 12:42 WINTON EXTRACT BOOK III.indd 4 16/10/2015 12:42 Florence’s Speculative Firenze 14th Century Crisis 1337–1345

In 1300, Florence’s Bardi and Peruzzi were undisputed champions of the lending field. They had won their spurs with their consummate mastery over commodities trading, but their vaulting ambition had encouraged them to enter into weak alliances with foreign lords and, after suffering several bruises, they were finally knocked off their steeds in the 1340s.

Start of the War between Florence Edward III’s on Hundred Years War and Pisa sovereign 1337 1338 1339 1340 1341 1342 1343 1344

Expulsion of Florentine Duke of Athens seizes of bankers from power in Florence Bardi & Peruzzi

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IN SEARCH OF PASTURES NEW

At the turn of the 14th century, European fi nance became increasingly reliant on the king’s willingness was dominated by Florentine merchant banking to repay his . At fi rst, both banks lent prudently families, the two largest of which were the Bardi and and did not overextend themselves. the Peruzzi. Their banks were immensely profi table In 1337, however, Edward III launched the Hundred institutions, operating all over Europe. In addition Years War and immediately requested big to lending, they engaged in international trade from the Florentine banks to fund his designs on the (primarily in grain, cloth and wool), commodities French crown. Although these loans were extremely and collecting papal tithes. However, risky and repayment depended on Edward III’s their continued success depended on their ability success against the French, the Bardi and Peruzzi to break into new markets. Florence at this time advanced the nonetheless, desirous of was experiencing rapid commercial growth, in retaining their trading privileges. The banks may also woollen textiles in particular, and her merchants have had other motives for taking on such reckless were depositing their profi ts at the Bardi and Peruzzi risks – Edward III bribed each of their agents and banks and investing in bonds underwritten by them. their agents’ wives with hundreds of thousands of This growth, however, could be sustained only if pounds in today’s money ‘in consideration of the new markets could be found for the supply of raw great help given the king’. materials and the exporting of fi nished products.

This led the Bardi and Peruzzi to – famed for its exceptional wool – and in exchange for loans to the English kings, these companies gained valuable trade concessions in a otherwise closed to foreign merchants. Although the Bardi and Peruzzi profi ted greatly from this trade, they also

ABOVE | Edward III centre | The Hundred Years War RIGHT | Medieval Venice

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LOSING REALITY ON THE RIALTO

Meanwhile Venice, Italy’s pre-eminent city-state, arch-rival, Pisa. Although Lucca was ultimately sold was heavily involved in speculation and was to a third party, war nevertheless broke out between exchanging European silver for Asian , resulting Florence and Pisa, resulting in a demand for war in a depreciating gold–silver price ratio across loans. So, apart from losing their primary export Europe. Although this brought to Venice’s market, the Bardi and Peruzzi were now compelled rulers and merchants, it seriously disadvantaged to underwrite a ruinously expensive domestic war, Florence, whose economy was based on the gold just when Edward III was marching over Flanders fl orin. More specifi cally, it put further stress on the and asking for ever larger advances. already overextended Bardi and Peruzzi, whose trade receipts were primarily denominated in gold and ENGLISH WOOL EXPORTS AND PRICES whose expenditures were mostly in silver. In 1338, SACKS OF WOOL GRAMS OF SILVER Venice’s rulers injured Florentine interests even more PER KG 40,000 directly by expelling all the Florentine bankers and 16

merchants, repudiating their debts and blocking off 30,000 12 all the trade routes in the north and east of Italy. PRICE 20,000 OF WOOL In 1339, the noose around Florence’s neck grew 8

yet tighter. In a delightful display of medieval 10,000 4 moneygrubbing, a band of German mercenaries WOOL EXPORTS 0 seized the Italian city of Lucca, Florence’s most 0 valued market, and offered to sell it to Florence’s 1300 1320 1340 1360 1380 1400 1420 1440

Thanks to the involvement of Bardi & Peruzzi, English wool exports and prices surged in the early 14th century

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Meanwhile, a vicious power struggle was occupying Florence’s two main political factions, the Ghibellines and the traditionally dominant Guelph. Shortly before the war with Pisa, the Ghibellines ousted the Guelph and sought protection from the . In protest, the Pope (who was allied with the Guelph) revoked the hugely lucrative licences to collect papal tithes held by the Bardis and the Peruzzis and urged a boycott against them. Accordingly, Naples expelled all its Florentine merchant bankers, depriving the system of its last major market.

ROOM WITH A DEPRESSING VIEW By late 1339, the Florentine economy was in tatters and the city’s streets were crowded with the dispossessed. Banished by the rest of the world and facing rising from Flemish and English textiles, Florence’s banks found that merchants were withdrawing their deposits and cashing in their bonds. This was catastrophic for the Bardi and Peruzzi and only a moratorium could offer any

GOLD–SILVER PRICE RATIOS IN ITALY 16

14

12

10

8

6

1250 1300 1350 1390

MILAN ASTI NAPLES ROME VENICE GENOA FLORENCE

Falling gold–silver price ratios in the 1330s created diffi culties for the Bardi and Peruzzi

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hope of salvation. However, the city’s new rulers England without any booty. The crowning blow came wwould not hear of any such step. Consequently, shortly afterwards, when Edward III defaulted on all tthe city’s bankers managed to arrange for a pliant his loans. Within the next two years, both the Bardi fforeign adventurer – the self-styled Duke of Athens and the Peruzzi had collapsed, sending waves – to seize power and rule Florence as dictator. around Europe and dragging down scores of other Predictably, his fi rst decree was a moratorium on banks with them. dried up, aall private debt. This bought the bankers some leapt and depression ensued, all just in time for the sshort-term relief. Soon, however, the Duke aimed European debut of Yersinia pestis. aat complete mastery and started to default on his Florentine bankers may have succumbed to the ddebts. This angered the bankers greatly and, in temptation of speculative over-lending, but they 1343, he was deposed in a general uprising. were also concerned about their eternal salvation TThe Bardi and Peruzzi were by this time in a wretched and donated much of their gains to building sstate, but still clung to the hope that their lending to churches and commissioning devotional art. Indeed, tthe English king would pay off. Imagine their despair were it not for Bardi’s and Peruzzi’s patronage of tthen when they learnt of Edward III’s battlefi eld Giotto, many of the ’s fi nest works reverses: he had halted the war and returned to might not have been with us today.

LEFT | Medieval bankers ABOVE | Battle of Cadsant, 1337

WINTON EXTRACT BOOK III.indd 9 16/10/2015 12:43 WINTON EXTRACT BOOK III.indd 10 16/10/2015 12:43 Tickling the tummies of Jackson’s wildcats

In the absence of a national , american ‘pet banks’ began rolling over in ecstasy with little paws-for-thought about the consequences of overstretching themselves, and speculators began slinking around in the warm Western markets. But when President Jackson took away their cream in mid-1836, the speculators scampered away.

‘The people of this country shall yet be punished for their idolatry.’

PRESIDENT JACKSON ON THE SPECULATIVE MANIA, 1836

1830 1833 1836 1837 Indian Mexican currency Specie Circular issued Panic – most Removals Act debasement by President Jackson banks suspend payment 1830 1832 1834 1836 1838

1832 1834 1836 Jackson distributes of England and raises government deposits to Rothschilds prefer Spanish to 5% state banks bonds to US bonds

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WHEN THE CAT’S LAPPING UP AWAY CREAMY LIQUIDITY Following the , the Bank of the United This monetary expansion resulted in a surge of infl ation States (BUS) was established to act as lender of last and provided speculators with cheap credit, fuelling resort in the event of future crises, and did precisely the pre-existing boom in land, and railroads. this in 1819, allowing a quick and full recovery. Land had been an object of speculation since the Indian Notwithstanding, the BUS was accused by some of Removals Act of 1830 which had freed up large tracts serving the interests of Eastern commerce rather than of land in the West; but the massive expansion of cheap (Western) agriculture and labour, subjects close to credit had turned boom into bubble by 1836. Pet banks President Jackson’s heart. He even referred often accepted land as collateral for loans – made in to the BUS as the Monster Bank. Accordingly unbacked paper notes – which would be used to buy he refused to renew the bank’s charter in 1832 and more land, creating a vicious circle. As Jackson correctly ordered that all government deposits in the BUS should

be redistributed to the newly established state banks or LAND PURCHASES FROM NATIVE ‘pet banks’, as they were derisively known. AMERICAN TRIBES FBEEBHGL Apart from depriving America of her main insulation 25 against crises, Jackson’s policies also resulted in the rise 20 of ‘’ and a massive monetary expansion. The recently established state banks were poorly 15

organised, inexperienced and above all imprudent, 10 issuing paper money with heedless abandon in the 5 absence of adequate reserves. Some Western banks even did business without reserves of any kind. 0 1825 1826 1827 1828 1829 1830 1831 1832 1833 1834 1835 1836 1837 Other factors also increased the . Silver Following the Indian Removal Act of 1830, the government started had been pouring into the country from Mexico since purchasing land from Indians and sold it to settlers at low prices, 1833 following the Mexican government’s decision which led to a speculative land grab to debase the currency in to reduce its defi cit. Meanwhile, silver exports from the US to China had dropped off sharply as the Chinese devoted more of their revenues to purchasing imported opium. Consequently, the US specie base rose by 135% between 1833 and 1837 and money supply rocketed from $50m in 1832 to $94m in 1834, and $140m in 1836.

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observed, ‘The receipts from the public land are In the heady days of early 1836, people were making nothing more than on the bank.’ As a result, so much money that even the Whigs dropped their land prices spiralled upwards. Canals and railroads objections to the pet banks and joined the bonanza. were also targeted by speculators in the early A prominent orator summed up this atmosphere of and attracted huge amounts of foreign capital, much prosperity during this period: ‘Never was the hum of of which came from England. mechanic industry so active; never were our streams Although foreign capital helped to sustain the boom, so vexed with toil and compelled to work their passage to the ocean; never did the water wheels run more above | it also allowed Americans to live beyond their means ‘General Jackson slaying the merrily. The blooming children swarm like clusters of many headed monster’ and to rack up a large trade defi cit. At the same time, it roses round your houses; the sweet smiles of conjugal LEFT | Spoof made the economy dangerously susceptible to external RIGHT | ‘The Downfall of Mother Bank’ (BUS) shocks, where interruptions to capital fl ows could easily love wipe all weariness from the brow of successful break entire cities or states. Such a situation developed labor; and smiling Industry walks through our villages, in 1834 when the Rothschilds and the Bank of England scattering plenty all around her with both her hands.’ – the two largest purchasers of American securities – plumped for Spanish bonds instead of American. A wave of swept the nation and America’s markets suffered a precipitous decline.

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THE WILDCATS UNSHEATHE THEIR CLAWS

By the middle of the year, however, concerns began to Further trouble came when British investments tapered be raised over the speculative excesses in the Western off during late 1836. Concerns over infl ation and land market. Consequently, President Jackson issued foreign speculative ventures led the Bank of England a ‘Specie Circular’ stipulating that all land must be to raise interest rates twice in the latter half of 1836, paid for in specie, anticipating that speculators would resulting in a credit contraction which made foreign lose interest when they could no longer fund their capital more expensive. It also reduced British demand purchases with paper. However, this policy seriously for American . backfi red. Instead of curbing the speculation, it merely Storm clouds now loomed ominously overhead. The increased Western demands for specie, draining only thing that could possibly avert disaster as far as Eastern commercial centres such as New York. Eastern the Eastern merchants were concerned was to repeal merchants and politicians were outraged. Delaware’s the Specie Circular, but Jackson doggedly refused to senator prognosticated, ‘Bankruptcies and ruin, at the do that. They were never going to have much luck anticipation of which the heart sickens, must follow in with a man who harboured such sentiments as ‘I the long train of evils which are assuredly before us.’ am opposed to all banks and banking operations ABOVE | President from the South Sea bubble to the present time’ and RIGHT | The hardships of tradesmen during the panic ‘stockjobbers, brokers and gamblers, would to God TOP RIGHT | President BOTTOM RIGHT | Uncle Sam Sick with La Grippe’, satire they were all swept from the land’. attributing economic difficulties to Jackson’s banking policies

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CATASTROPHE

By spring 1837 the situation was grave. Merchants had hoped that the incoming president, Martin Van Buren, LIABILITIES OF THE SECOND BANK OF THE would prove more receptive to their demands. But he FBEEBHGL proved to be just as infl exible on the Specie Circular 25 =>IHLBMLA>E= AT THE BANK as his predecessor had been. The crowning blow 20

fell in early May when the president of a major New 15 York bank blew out his brains, leading to a run on his 10 bank. Confi dence shattered and New York depositors 5 scrambled to liquidate their . By 9 May most New  ;:GDH?>G@E:G==BL general insolvency of the banks… workmen thrown % 20 7 out of employ by the hundred daily. Business at a stand; the coal mines in Pennsylvania stopped, and no fuel in 15 6 prospect for next winter – delightful prospects these.’ 10 5 The panic was then followed by one of the 19th century’s =BL 5 4 worst depressions. By the autumn, nine-tenths of

America’s factories had closed and the winter months 0 3 of 1838 brought starvation and deaths from exposure. 1830 1831 1832 1833 1834 1835 1836 1837 1838 1839 1840 A commentator noted, ‘Cold April; hard times; men breaking who ought not to break; banks bullied into the bolstering of desperate .’ People were also very angry and sought scapegoats for their miseries. Predictably, some blamed the Jews. The governor of Mississippi, for example, imputed the panic to ‘the Baron Rothschild’, claiming that ‘the blood of Judas and Shylock runs in his veins’. More enlightened observers, however, got closer to the mark when they pointed the fi nger at the ‘feverish, insatiable cupidity’ of in the years preceding the panic. There was a recovery in the latter half of 1838, but gloom soon returned the following year when the Bank of England raised interest rates, and the depression rumbled on for another three years.

WINTON EXTRACT BOOK III.indd 15 16/10/2015 12:43 WINTON EXTRACT BOOK III.indd 16 16/10/2015 12:43 Slaughtering the Golden Bull friday 1869

When and Jim Fisk, two of ’s most unscrupulous operators, hatched a plot to corner gold in 1869, grisly scenes were inevitable. After driving prices up to spectacular levels, the two men left the Gold Exchange’s bulls for dead when they were stunned by a market .

‘I wish every one of them had his devilish head shot off.’

PRESIDENT LINCOLN ON NEW YORK GOLD SPECULATORS

(1 September) (24 September) (15 June) Gould initiates ‘’ Gould meets Grant corner corner collapses 1869 1870

(Mid-September) Corbin’s letter to Grant advising against gold sales

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KILLINGS IN GOLD

Following the Civil War there was a mismatch between the gold, currency and commodity markets, creating arbitrage opportunities for Wall Street. For example, although greenbacks were used for domestic payments, gold was still used for international settlements, and by exploiting their knowledge of the European demand for US grain, speculators could profi t from fl uctuating exchange rates between paper greenback and gold coin. Accordingly gold became the main object of speculation.

Against this backdrop, two notorious speculators, Jay Gould and , hatched a plot to corner the New York Gold Exchange, hoping to make a killing and destroy their rivals at the same time. Of course, their plan relied on the acquiescence of the US Treasury – the largest holder of gold – to rising prices and its non-intervention. In retrospect, this was a huge assumption, yet Gould was confi dent and believed that he had found a willing if unwitting accomplice in President Ulysses S. Grant.

In a series of encounters brokered byby thethe President’sPresident’s brother-in-law, Abel Corbin (who wwasas also in on the plot), Gould impressed upon Grant the importanceimportance of halting federal gold sales and allowingowing goldgold prices to rise. Playing the part of a mmonetaryonetary infl ationist, Gould argued that this wouldwould benefibenefi t America’s farmers, who in recent yearsears had been experiencing reduced European demandmand forfor grain, due to gold’s declining exchangenge rate for greenbacks. Increased foreign demand for grain would also revive the Erie Railroad’s earnings if it could transport the grain to the East for export, though understandably perhaps Gould failed to mention this point

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WHETTING THE CLEAVER

Meanwhile, Gould began raising funds for gold a couple of setbacks, Gould forced Corbin to write purchases. He already had the profi ts from the Erie to Grant advising him against further gold sales. Railroad but supplemented these by getting involved This message unsettled Grant, who immediately EVIL ENCHANTERS with several New York funds and in July taking sent a letter to Corbin, warning him not to have any New York’s Gold Exchange, control of the Tenth National Bank, which gave him dealings with gold speculators. located on Broad Street, was a access to cheap credit. In the same month, Gould, tumultuous place at the best of times, let Upon receiving Grant’s letter, Corbin wanted out, but through Corbin, managed to secure the appointment alone on Black Friday. Observers likened Gould refused and ordered him to keep quiet. For of another plot member, General Daniel Butterfi eld, it to ‘a rat-pit in full blast’ and a ‘human his own part, Gould realised that he could no longer as Assistant Treasury Secretary. maelstrom’ where ‘men battle for gold, depend upon Grant to restrict federal gold sales and gold, gold, with a naked greed and fury Eventually, by early September, Gould was convinced resolved to quietly close his position under cover of that satirizes life beyond all imaginings’. that Grant was committed to monetary infl ationism. Fisk’s continued purchases. It is not clear whether The fi nancial journalist James Medbury Gould and Fisk began secretly accumulating large Fisk was aware of Gould’s secret sales, but it seems painted the scene in even more lurid quantities of gold, whilst publicly encouraging the likely, given that the twain did not fall out afterwards. terms: ‘The Gold Room was like a cavern, market to go . After this they sat back and Moreover, Fisk evidently shared Gould’s apprehension full of dank and noisome vapors, and waited for the anticipated price surge following about the gold scheme since he placed all his orders the deadly carbonic acid was blended the discovery of the corner. As the plot progressed, through an intermediary and left no written records, with the fumes of stale smoke and vinous breaths. But the stifl ing gases however, they began to overplay their hand. After allowing him to repudiate any future debts. engendered in that low-browed cave of evil enchanters, never seemed to depress the energies of the gold-dealers; from “morn to dewy eve” the drooping ceiling and bistre-colored walls re-echoed with the sounds of all kinds of voices, from the shrill, piping treble of the call boys, to the deep bass of R. H., J. R., L. J., etc., etc., while an upreared forest of arms was swayed furiously by the storms of a swiftly rising and falling market.’

OPPOSITE, top | Jay Gould OPPOSITE, bottom | James Fisk left | Fisk’s failure to corner the gold market

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STUNNED SENSES PUBLIC OUTCRY

Having thus covered himself and his associate, Fisk ‘Around the fountain, which occupies the centre of Legions of brokers were ruined that day. Fisk’s instructed his broker, Albert Speyers, to up the ante the room, some 200 persons were collected, and brokers, Belden and Speyers, had been left with and deliver the coup de grâce to the short sellers. he who can imagine the din created by 200 human debts approaching $100m. Soon angry mobs formed On Thursday 23 September, there were chaotic voices, all hoarse and discordant from over-use, outside the Gold Exchange and Gould’s brokerage scenes as the gold price climbed ever higher, wiping and all exerted to the utmost at the same moment, demanding satisfaction. Conscious of their safety, out scores of small bear speculators, and by the end may perhaps form a slight conception of the Bedlam Gould and Fisk stole out of a side door and retreated of the day Fisk’s intermediary held $110m of gold. here presented. Nor did all the doughty bulls and to ‘Erie’s Castle’ where they were defended by Clearly matters would soon come to a head. The bears confi ne themselves to bellowing and roaring. hordes of armed railroad navvies. Not only had next morning, on ‘Black Friday’, Speyers opened the Their gesticulations, their jostling and crowding, Gould emerged unscathed from the débâcle but bidding at $150 in greenbacks per hundred dollars in their restless change of position, all indicated the he had also reportedly made $11m in profi t. Fisk gold coin and was subsequently ordered to raise the excitement under which they labored.’ likewise suffered few ill-effects from his handiwork: price to $160. Then, just before noon, the Exchange he blithely repudiated his obligations and even had ‘The shouts and cries of the hundreds of active learnt that the Treasury Secretary had ordered the the temerity to complain during the subsequent operators seemed here like the outpourings of sale of $4m of gold, whereupon the price came Congressional investigation that ‘A fellow can’t have maniacs, and for a short time a pallor seemed to crashing down to $135, even though Speyer, ‘crazy a little innocent fun without everybody raising a overspread the faces, and a tremor to overcome the as a loon’, carried on bidding at $160. Brokers, facing halloo and going wild.’ Few others saw it like that persons of the mass, which had been wrought up to ruin from their long positions, became ‘quite crazy and Fisk’s name became a byword for depravity. On a point beyond human endurance. The majority felt or at least, irresponsible, and ran hatless to and fro, the Sunday following Black Friday, many preachers the ground breaking under them, and as they saw gesticulating and making incoherent bids and offers themed their sermons on Matthew 6: ‘Lay not their margins gone, their fortunes broken and their among others who hardly saw them or realised where up yourselves treasures on earth’, with one cleric hopes blasted, they stood bewildered and perspiring they were. Then the rumours grew wilder and wilder describing Fisk as ‘that supreme mountebank spectators, in a room which is ordinarily the scene of – true and false mixed up together.’ of fortune... absolutely devoid of moral sense as the friendly rivalry and humorous interchanges.’ desert of Sahara is of grass’. The New York Times furnished readers with riveting accounts of Friday’s proceedings: GOLD PRICES IN 1869 $ PRICE OF A HUNDRED DOLLARS INTRA-DAY PRICES ON IN GOLD COIN IN GREENBACKS 24 SEPTEMBER 1869 165 165 HIGH 11.30 a.m. 160 160 155 155 150 150

145 145 11.00 a.m. 140 140

135 LOW 135 130 12.15 p.m. 125 31 28 31 29 20 31 30 31 24 JAN FEB MAR APR MAY JUN JUL AUG SEP 120

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Whilst Fisk may have pulled this one off, he was laughing on the other side of his face three years ‘ISRAEL FREYER’S ‘Five Millions more! – for any part, later when he was shot by his mistress’s lover. (If it breaks your fi rm, if it cracks your heart,) Gould’s career was longer but no less colourful: BID FOR GOLD I’ll give One Hundred and Sixty!’ after being double-crossed by an associate, he One of the brokers, E. C. Stedman, One Hundred and Sixty! Can’t be true! organised a cross-border kidnapping and nearly captured the drama of Black Friday in a poem What will the bears-at-forty do? provoked a war with Canada. which he wrote the next day. Israel Freyer, the How will the merchants pay their dues? subject of the poem, is code for Fisk’s broker How will the country stand the news? FAR left | Fisk, Gould and Corbin plotting the Gold Corner Albert Speyers. What’ll the banks – but listen! hold! above | Scene outside Gould’s brokerage house on Black Friday In screwing up the price of gold Zounds! how the price went fl ashing through To that dangerous, last, particular peg, Wall Street, William, Broad Street, New! They’d killed their Goose with the Golden Egg! All the specie in all the land Just there the metal came pouring out, Held in one Ring by a giant hand – All ways at once, like a water spout, For millions more it was ready to pay, Or a rushing, gushing, yellow fl ood, And throttle the Street on hangman’s day. That drenched the bulls wherever they stood! Up from the Gold Pit’s nether hell, Small need to open the Washington main, While the innocent fountain rose and fell, Their coffer-dams were burst with the strain! Louder and higher the bidding rose, It came by runners, it came by wire, And the bulls, triumphant, faced their foes. To answer the bid of Israel Freyer, It seemed as if Satan himself were in it: It poured in millions from every side, Lifting it one per cent a minute And almost strangled him as he cried, Through the bellowing broker, there amid, ‘I’ll give One Hundred and Sixty!’ Who made the terrible, fi nal bid! High over all, and ever higher, Like Vulcan after Jupiter’s kick, Was heard the voice of Israel Freyer, Or the aphoristical Rocket’s stick, Down, down, down, the premium fell, A doleful knell in the storm-swept mart, Faster than this rude rhyme can tell! ‘Five Million more! and for any part Thirty per cent, the index slid, I’ll give One Hundred and Sixty!’ Yet Freyer still kept making his bid, Now through his thankless mouth rings out ‘One Hundred and Sixty for any part!’ The leaguers’ last and cruellest shout! The sudden ruin had crazed his heart, Pity the shorts? Not they, indeed, Shattered his senses, cracked his brain, While a single rival’s left to bleed! And left him crying again and again, Down come dealers in silks and hides, Still making his bid at the market’s top (Like the Dutchman’s leg that never could stop,) Crowding the Gold Room’s rounded sides, ‘One Hundred and Sixty Five Millions more!’ Jostling, trampling each other’s feet, Till they dragged him, howling, off the fl oor. Uttering groans in the outer street; The very last words that seller and buyer Watching, with upturned faces pale, Heard from the mouth of Israel Freyer The scurrying index marks its tale; A cry to remember long as they live Hearing the bid of Israel Freyer, Were, ‘I’ll take Five Millions more! I’ll give – That ominous voice, would it never tire? I’ll give One Hundred and Sixty!’

WINTON EXTRACT BOOK III.indd 21 16/10/2015 12:43 WINTON EXTRACT BOOK III.indd 22 16/10/2015 12:43 Busting the Brazilian Bronco 1889–1891

When ’s government in 1889 made it easier for banks to lend, herds of Brazilian investors began worshipping the golden calf with unbridled zeal but were quickly encircled by cowboy promoters keen to make a few bucks. The stampeding bulls were eventually brought to halt the following year.

‘There was a fever, a madness. Money spread itself around here in a real flood. One was given the impression that everyone had gone insane.’

EVARISTO DE MORAIS

(June) (November) (Summer) Viscount of Ouro Preto Monarchist government Second stock becomes Brazilian ousted by military coup market boom Prime Minister 1889 1890 1891

(Summer) (January) (November) First Banks allowed to boom back issues with bonds

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GIDDY-UP

Upon assuming power in June 1889, Brazil’s monarchist prime minister, the Viscount of Ouro Preto, faced republican opposition from large sections of the population, including planters who had recently been forced to give up their slaves. Although the viscount could not reinstate slavery, he sought to mollify the planters by subsidising immigration as well as providing interest-free agricultural credit, creating ‘banks of issue’ and lowering capital adequacy ratios. These measures produced an , centred in Rio de Janeiro, which soon became known as the Encilhamento – contemporary horse-racing parlance for ‘saddling up’.

The zeitgeist of the bubble is vividly captured in the opening passages of Van Taunay’s O Encilhamento (1893). Under ‘a rather caustic sun... noisy and agitated multitudes [of speculators] fi lled the whole block from Alfandega Street to Primeiro de Marco Avenue’, crowding around Banco do Brasil and the .

‘From time to time, tortuous channels opened up through which, wriggling out of a group, brokers and middlemen hurriedly stole away, lightly and cleverly. There were an incalculable number of middlemen, of all ages, eyes glaring, bathed in sweat, with their hats fallen over the napes of their necks and handkerchiefs tied around their throats like a baby’s bib, shouting buy, sell, without Practically everybody participated in the carnival NUMBER OF SECURITIES LISTED ON specifying just what they wanted to buy and sell. of speculation, not just Rio’s old money; ‘all classes RIO DE JANEIRO’S STOCK EXCHANGE 120 “Two hundred Republicas”, one announced with an of society mixed together, in confusion...a world of TOTAL insistent and strained shout. “How much?” “83.” strangers...men from all parts of Brazil, some even 100 BANKS “It’s a deal.” And notes were written quickly on from the old exchanges of Europe...carrying...thick 80 little pieces of paper or on men’s false shirt cuffs, wads of notes, tied together with...string in the form 60 which were already covered with fi gures, while of a cross...’. For everybody was in pursuit of Fortune, 40 people exchanged a thousand rough hand signals in ‘voluptuous...like a pink and fl eshy Rubens courtesan..., 20 0 the air, simple blinks of the eye, which initiated big stumbling,...slightly drunk, offering her entire, 1888 1889 1890 1891 1892 1893 business deals, or above all concluded them.’ lascivious, naked body..., a deceptively easy prey.’

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LASSOING STUPID BULLS However, Fortune was also rather manipulative and enjoyed playing tricks on her lovers. The vast majority of the companies being established and traded during the Encilhamento were unnecessary and designed to bilk as much speculative capital as possible: ‘We see gigantic companies established to boil soap, make candles, forge nails, manufacture buttons.’ It was for this reason that Taunay likened the Stock Exchange to a ‘huge lighthouse against whose glass… large and mysterious ocean birds throw themselves to fall wounded, dying, or dead… on the sharp rocks beneath them.’

In November, the viscount was ousted in a military coup and Brazil became a republic. The new rulers, keen not to antagonise their supporters, the planters in particular, left many of their predecessor’s stimulatory fi nancial policies in place. But the political upheaval

had frightened off Brazil’s international creditors and OPPOSITE | Cotton’s map of Brazil, 1855 provoked a disastrous capital fl ight, leading to a stock ABOVE, top | Proclamation of the Republic, 15 November 1889 market collapse and currency depreciation. above | View of Rio de Janeiro produced as a marketing card for a French biscuit manufacturer

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YEE-HAW

Seeking to reinvigorate the economy, the new Minister decreed in January that banks could back their issues with bonds instead of gold. MANAUS This decidedly infl ationary measure was designed to free up more currency for circulation and encourage Until Malayan rubber came on in his villa, and a third would water his horse banks to lend more freely. However, the decree tap, Brazil was the world’s sole producer of on champagne.’ It was even reported that ‘on worked rather too well and the Encilhamento rubber and reaped fabulous profi ts. Rubber the grimy fi ngers of down-at-the-heels clerks... returned with a vengeance. Banks lost all inhibitions sprang up in the middle of the glittered diamond rings worth hundreds of and issued paper with abandon, especially as their Amazonian rainforest, including the legendary dollars.’ Manaus’s residents rode through Manaus, which, during the 1880s, was the the city in electric trolleybuses – the fi rst in shareholders were not obliged to cover depositors’ richest city in the Americas. Her rubber barons the Americas – and a grand opera house losses. By autumn, the Encilhamento was galloping lived in magnifi cent palaces, replete with was constructed. It cost millions of dollars at such a pace that even Burbosa’s attempts to pianos and chandeliers, and sent their laundry and boasted stupendous domes and gilded bridle it met with little success. But where Burbosa to Europe. ‘No extravagance, however absurd, balconies, although even this opulence did not failed, Barings of London succeeded. In November, deterred [the rubber barons]’, wrote one stop half the members of one visiting operatic after Barings ran into diffi culties in Argentina, historian. ‘If one rubber baron bought a vast troupe from dying of yellow fever. foreign investors also pulled out their capital from yacht, another would install a tame lion neighbouring Brazil, sending the milreis reeling and decisively hobbling the Encilhamento.

The collapse of the Encilhamento bore mixed results. Brazilian banking and the milreis remained weak for several years but the lessons of the Encilhamento were incorporated into the banking laws of 1906, putting the Brazilian economy on a much sounder footing. The surge of credit during the Encilhamento also allowed Brazil to expand its production threefold, thus cementing its status as the world’s primary producer.

RIGHT | Harvesting rubber INSETs | Contemporary postcards of Manaus FAR RIGHT | House of a wealthy rubber collector

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WINTON EXTRACT BOOK III.indd 27 16/10/2015 12:44 WINTON EXTRACT BOOK III.indd 28 16/10/2015 12:44 Panning in sludge the 1969

When a small Australian mining company stumbled upon nickel in 1969, it was able to exploit large deposits of euphoria and extract high prices. This encouraged other low-grade companies to drill down and pan for profits, but when the finds turned out to be very nickel-and-dime, investors and promoters were soon forced to go back to the salt mines.

‘ is not only well endowed with minerals. It is also generously endowed with share manipulators.’

LETTER TO THE EDITOR, WALL STREET JOURNAL, 15 OCTOBER 1969

(September) (February) Poseidon announces Poseidon share price nickel discovery peaks at $280 1969 1970 1971

Mid-1969 (23 January) (Late January) Inco ceases Rumour spreads of ASX All Mining production of nickel nickel discovery in Index peaks Mount Venn area

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AUSTRALIA’S FIRST MINING BOOM

ORE-STRUCK Australia experienced a major boom during 1871 The Poseidon boom took place towards the end of and 1872. Following a stockman’s Australia’s ‘long boom’, a period during the 1950s POSEIDON SHARE PRICE discovery of gold deposits in New South Wales, ‘The clerk threw down his pen, and 1960s characterised by sound macroeconomic AUSTRALIAN $ 250 the tailor abandoned his shears, and the fundamentals. Growth in Australia’s mining sector shop man fairly jumped the counter, and was particularly strong, with the ASX All-Mining 200 then all rushed to the gold fi elds.’ The share index increasing by 25% each year. Most 150 prospectors had to endure great hardships of this growth came from heavy metals other but ‘What care they for an unhealthy 100 than nickel. Although it was always thought that valley, a hot climate, bad fare, mosquitoes,

Australia had large nickel deposits, few had ever 50 alligators, fevers, and all other abominable, been found, with the world’s supply coming almost and unutterable things, so long as there 0 was gold for the picking up?’After a entirely from the Canadian producer Inco. In mid- SEP OCT NOV DEC JAN FEB MAR APR 1969, however, Inco, experiencing industrial action, 1969 1970 prospector exhibited a ‘monster’ gold was forced to halt production, and this, combined cake at a Sydney show in 1871, investors threw caution to the winds and snapped with increased world demand due to the Vietnam a market capitalisation of AUS$700m. At this up all the available mining shares, pulling War, caused the price of nickel to skyrocket. valuation, Poseidon was worth three times more than capital from more productive industries. the Bank of New South Wales and was over one-third Little wonder then that when Poseidon – an obscure Inevitably, many investors were deceived of the value of the infi nitely larger and more profi table mining outfi t in Western Australia – announced in by duplicitous promoters who had ‘sprung BHP Billington – pretty impressive for a company with late September that it had found nickel, it caused up like weeds’, establishing parasitical only one mine! This fact is all the more remarkable bubble companies and salting mines quite a stir. Poseidon’s share price, which had when one considers that much of the trading during with false nuggets. One newspaper already started to rise as a result of insider trading, this period was based on little more than noting the characterised these companies in the shot up by over 1500% in the space of a few days, colour of the sludge on the drillers’ boots – orange following announcement: ‘The Gigantic prompting one paper to exclaim, ‘Nickel boom turns hues indicating the presence of nickel sulphides – and Bamboozle Gold, Tin, and Copper radioactive.’ The shares continued to rise, peaking at aerial photos of the mining site. Mining Company (Limited), Vulture’s Hill. AUS$280 in mid-February, which gave the company Directors: Uriah Heep, Chevy Slyme, Oilyy Pecksniff. Brokers: Catcham QuicQuick,ck Nabbum and Co., the DevDevil’sil’ Chamber, Bottomless- pitpit-street.’-sst Eventually, questions begbeganga to be raised about the lolong-termng profi tability of these veventures.en By mid-1873, ‘s‘suspicionsu had been caccast on the Elysian repose of mmany sanguine hearts’ and pprices plummeted.

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SWINDLERS’ QUARRY

From fairly early on, outsiders sought to cash in the company’s chairman on 27 January, the price Financial Review led with the on the aura surrounding Poseidon. Scores of new rose to AUS$70 and the chairman at once sold out, headline, ‘Shares crack: quality mining companies were fl oated, many of which were bagging a large profi t. Nothing more was ever heard counts – blue sky prospectors turn grey in heavy of a distinctly shady character. For example, when of Tasminex or Mount Venn’s nickel. setback’. It was also becoming clearer to investors Tasminex announced on 23 January 1969 that one that many of the major assumptions upon which the Such behaviour gave mining shares a bad reputation, of its directors had identifi ed some heavy metal high valuations were based were in fact false. World and after reaching a peak in late January the ASX traces whilst panning drill samples in the Mount nickel prices did not remain at the high levels of 1969 All-Mining Index started to decline. Poseidon shares Venn area, it allowed the rumour to be spread that but fell signifi cantly; extraction costs were higher than held on for a little longer, climaxing in February, but it had actually discovered nickel, causing its share expected whilst ore grades were disappointingly low. then also started to fall. The exact trigger for the price to rise to AUS$16.80 over the next few days, Poseidon eventually started to exploit its Windarra market turn remains unclear, but certainly around this and pulling up the share prices of every mining site in 1974 but output was so low that it was delisted time there was much more negative coverage from company in the area. Following an interview with on the Australian Stock Exchange just two years later. the press. On 18 March, for example, the Australian

ABOVE | Poseidon’s nickel mine, Windarra, Australia

WINTON EXTRACT BOOK III.indd 31 16/10/2015 12:44 WINTON EXTRACT BOOK III.indd 32 16/10/2015 12:44 The Bear with a Sore Head russian rouble crisis 1998

After the breakup of the Soviet Union, the Russian bear became reliant upon short-term debt. To begin with, Western investors greedily dipped their paws into the emerging markets’ honey pot, but when they were stung by the East Asian crisis in 1997, they backed off, forcing Russia to devalue the rouble..

‘When you hear talk of , spit in the eye of whoever is talking about it.’

CHAIRMAN OF OF RUSSIA

(23 March) (July) (23 September) Oil prices Sergei Kiriyenko IMF of LTCM decline becomes $22bn to Russia Prime Minister 1998 1999

(13 August) (17 August) Soros recommends Russian default Russian devaluation

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SCAVENGING THE PAWS-FOR-THOUGHT LEFTOVERS After the breakup of the Soviet Union in 1991, Following the East Asian Crisis, however, many Russia descended into economic chaos. Sweeping investors began to have second thoughts about privatisations brought state industries into the investing in emerging markets such as Russia and hands of owners who were often more concerned started demanding high risk premiums, pushing up with cheeseparing and stripping than running GKO yields and increasing the debt burden. Meanwhile, effi cient enterprises, ‘We sold off a herd of elephants starting in early 1998, oil prices began to decline, at rabbit prices, and now a new class of owners reducing Russia’s export revenues and forcing the is trying to feed them at the price of a carrot a government to spend more and more of its dollar day’, lamented one apparatchik. As the country’s reserves to prop up the fi xed . manufacturing base shrivelled, imported goods took By spring 1998, the Russian economy was the place of domestic goods, fi scal defi cits grew and fl oundering and needed a lifeline. Sergei Kiryenko, the GDP tumbled. Yet, despite these alarming trends, the new Prime Minister, began negotiations with the Russia was able to tread water for several years by IMF, which approved a $22bn loan in July. However, living off its exports of natural resources and selling this was insuffi cient to cover all the government’s more of the family silver to foreigners. liabilities, and did little to allay the concerns of In view of the persistent budgetary defi cit, the Russian foreign bondholders. Goldman Sach’s second issue government became increasingly reliant upon issuing of GKOs also fl opped. Running out of options, treasury bills to fund its debt, specifi cally short-term the Ministry of Finance turned for help to George (typically 30-day) rouble-denominated bills known as Soros, estimating that they needed an additional GKOs. GKOs were lower yielding than longer maturity $10bn. Soros tried pulling strings at the US Treasury bonds and were cheaper for the Russian government to Department, but ultimately his appeals fell on stony service, but they also needed to be refi nanced regularly, ground and, frustrated with the lack of progress, increasing the rollover risk. At fi rst, the GKOs were well he went public. In a letter to the Financial Times received by the market, since emerging markets were published on 13 August, Soros argued that as part all the rage at the time and many analysts believed that of a Western package, Russia should devalue its the West would never allow a nuclear power to default. currency by 15–25% to lighten the burden of GKO interest payments. Although this was a sensible BOND YIELDS: US vs EMERGING MARKETS policy prescription, investors and government US 10-YEAR TREASURY BOND YIELD EMBI offi cials alike were wary of Soros’s motives and !" !BG=>Q" 5.5 2,000 concluded that he was preparing to mount a BOND YIELD speculative attack on the rouble (as he had done 5.0 1,500 against sterling in 1992), and liquidated their GKOs 4.5 1,000 en masse, pushing up yields to 165%.

EMBI 4.0 500

3.5 0 *221 *222

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LONG TERM CAPITAL MISMANAGEMENT BEAR BAITING The most famous casualty of the Russian crisis was Long Term Capital Management (LTCM), a risk Matters came to a head on 17 August, ‘’. arbitrage hedge fund set up in 1994 by Unable to bear the weight of GKOs any longer and John Meriwether, the former head of bond with no more reserves, the government defaulted on trading at Salomon Brothers. LTCM, whose the GKOs and abandoned the fi xed exchange rate; investment strategy has been likened to the rouble shed over two-thirds of its value against ‘picking up nickels in front of an oncoming the dollar over the course of the day. Russian banks, bulldozer’, believed that the West would not allow nuclear-armed Russia to default which had invested over half their assets in GKOs, and had been long on Russian debt right made heavy losses and many were forced to close – to the bitter end, buying even more GKOs fi ve out of Russia’s ten largest banks folded. Infl ation in mid-August when everybody else was at surged, quadrupling foreign imports. Anticipating panic stations. When Russia defaulted, ‘the general economic meltdown, people rushed to the losses came from every corner. They were so swift, so encyclopaedic in their breadth, supermarkets and swept the shelves clean, creating a so utterly unexpected that the partners felt shortage of even the most basic essentials. abandoned. They had suddenly lost control, Many foreign investors were caught out and nearly as though the gods of science had been dislodged and some unseen diabolical power every hedge fund suffered losses in August, and some had taken control of their fates.’ went bust, including the appropriately named ‘High Risk Opportunities Fund’. LTCM was mortally wounded (see inset). Ironically, Soros’s Quantum Fund, which the blame on Prime Minister Kiryenko – ‘the ever so was commonly believed to be shorting the rouble, was correct, clean, clever little politician whom Yeltsin actually massively long and as a result lost $1–2bn. adores’, who was labelled by the Moscow Times as Until the mid-1990s he had shied away from Russia, but ‘a little boy to whom for some reason the adults gave thereafter became an enthusiastic purchaser of Russian permission to play with matches’. Another common securities and bought a $1bn stake in Syazinvest. He scapegoat was Kiryenko’s predecessor, Chernomyrdin: later said that he had been well aware of the risks of ‘Filled with Unbelievable Self-Confi dence, such investments but was motivated by a philanthropic Chernomyrdin Is Bravely Heading… No One Knows desire to help stand Russia on its own feet: Where.’ For most people, however, it was President Yeltsin who was ultimately responsible for the crisis. ‘I deliberately chose to expose myself. To be a selfl ess Several months earlier it had been claimed that he was benefactor was just a little too good to be true. It fed my ‘chosen by God’ and was ‘the most progressive man on self-image as a godlike creature, above the fray, doing earth’, whereas now his popularity rating stood at 2%. good and fi ghting evil… And by entering the fray as an investor, I descended from Mount Olympus and became The rouble crisis had grave consequences for a fl esh and blood human being… I have no regrets with Russia’s economy and fi nancial system but on the regard to my attempts to help Russia move toward an fl ipside many of Russia’s domestic producers now open society: they did not succeed but at least I tried.’ found that they could compete with their foreign rivals. To this extent, the crisis was a godsend for The crash not only brought down the economy, but the likes of AvtoVAZ – the makers of Lada. also many political careers. Many people pinned

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