The Corners of Wall and Broad

The more things change, the French are fond of saying, the more they stay the same. The French have never been exactly renowned for their respect for the free market, but nowhere is their famous proverb more true. The laws of economics that rule the market are immutable, and traders through the ages have employed the same tactics over and over in pursuing their fortunes. Sometimes they have won, sometimes they have lost, but the market, like the Mississippi, “just keeps rollin’ along.”

The most spectacular—and potentially the most remunerative—market tactic has always been the corner. A trader with a corner owns all of a commodity—whether it be corporate shares, gold, or pork bellies—that is available for sale, and thus any potential buyer must buy from him or do without. The reason a corner can be so rewarding is that short sellers, often, can not do without.

A short-seller tries to make money by a decline in price. To do this, he sells a commodity he does not own, hoping to buy it later at a lower price and pocket the difference. In a successful corner the short sellers discover—too late—that they have sold to the trader who already owns all there is and who can thus set whatever price he chooses when he demands delivery. When a true corner is achieved, the short sellers, caught in a financial pincers, are said to be squeezed, an exciting, often noisy, sometimes messy event.

But achieving a true corner is very difficult. Somehow all the supply has to be bought up or neutralized, without others finding out and fleeing the trap or sending the price through the roof. Pulling off a successful corner, therefore, calls for luck, skill, courage, and financial resources in large amounts. Through the ages, despite the difficulties, there has been no lack of traders willing to try.

The first corner in New York took place in 1666, when the city was only 40 years old and Wall Street was not its financial center but its northern defensive boundary. That was the year Frederick Philipse cornered the wampum market. Philipse had been born in Holland in 1626 and moved with his father to New Amsterdam in 1647. Trained as a carpenter, in 1652, Philipse actually helped build the wall that gave Wall Street its name.

Philipse did not remain a carpenter for long. Capable and ambitious, he soon took one of the royal roads to wealth: he married a rich widow. With his wife’s money behind him, Philipse began to trade with the Indians.

The Indians, the source of the furs that were the mainstay of New York’s economy in the seventeenth century, did not want gold and silver in payment for them. They wanted what they regarded as real money: wampum. Wampum is a tubular bead, usually strung with others in intricate patterns, made from clamshells. In 1650, six white beads or three black beads were worth one stuiver, the Dutch equivalent of a nickel.

Unfortunately, wampum inflation set in, and, by 1659, it took sixteen white beads to equal a stuiver. This played havoc with the local economy, not only because it drove up the cost of furs but because the settlers as well as the Indians used wampum in day-today transactions. Gov. Peter Stuyvesant tried the usual government remedies (price controls) with the usual results (they were ignored).

Then Frederick Philipse began buying wampum and taking it out of circulation, burying it in hogsheads. He soon controlled the market in wampum and succeeded in raising its price dramatically. By 1666, it took only three white beads to equal a stuiver.

The concept of a central bank did not even exist until the eighteenth century, but Frederick Philipse in the middle of the 17th century was, in effect, acting as one, regulating the money supply and doubtless making a tidy profit in the process. He went on to become the colony’s richest citizen, with trading interests as distant as the East Indies and Madagascar.

As Wall Street’s financial markets increased in size and scope, so did the number of corners attempted. By the mid-nineteenth century, it seemed to one ardent speculator of the day that “hardly a week goes by without a recurrence of these singular phenomena.” Commodore Vanderbilt earned Wall Street immortality by cornering Harlem Railroad stock twice and Hudson River Railroad stock once, all in twelve months’ time. Perhaps the most famous corner story in Wall Street history took place in 1869, when Jay Gould and Jim Fisk nearly cornered gold.

But as the size of stock issues increased, the money required to corner one increased too, and the number of corners began to decline. The last one to take place on the New York Stock Exchange was in the early 1920s. Today, with a host of regulations that firmly discourage corners, it is highly unlikely there will ever be another.

But if corners are extinct on the Stock Exchange, they are not altogether gone from Wall Street. Indeed, one of the Street’s greatest attempts occurred only eleven years ago, when Nelson Bunker Hunt and his younger brother William Herbert Hunt tried to corner the silver market in 1980.

Silver, unlike gold, has numerous industrial applications, so there is a strong demand for the metal even apart from its monetary uses. But because silver was used as money, the U.S. government had long fixed the price at around $1.25 an ounce. By the mid-sixties the government found it could no longer maintain this policy because demand for silver was growing swiftly, while world production lagged. The United States, in effect, was forced off the silver standard. The Treasury recalled the old one-dollar silver certificates and reduced or eliminated the silver content of coins.

In the early 1970s, Bunker Hunt thought he saw opportunity in silver, just as Frederick Philipse had seen it in wampum. Inflation was rising, which meant that the prices of gold and silver were likely to rise as the dollar sank.

At that time it was illegal for Americans to own gold, so Hunt set out to acquire silver. Being one of the richest men in the world, he bought silver on a massive scale and almost singlehandedly doubled the price in 1974 from $3.27 to $6.70 an ounce. And unlike nearly all modern commodity traders, he took delivery, removing the silver from the marketplace. Again, he was doing exactly what Frederick Philipse had done with wampum three hundred years earlier.

By 1979, the Hunt brothers had accumulated as much as 200 million ounces in bullion and futures, just about the amount of silver that was thought to be in the floating supply. With the silver available for trading rapidly dwindling, the price ratcheted up all through 1979. Tiffany’s was even forced to close its silver department at one point in order to reprice everything sharply upward. In early January 1980, the price of silver reached $50.05 an ounce. The Hunts’ hoard was worth, on paper, $10 billion. The first great Wall Street corner in nearly sixty years seemed to be at hand.

But the problems that have plagued all would-be cornerers plagued the Hunts as well. They had borrowed hundreds of millions to buy the silver on margin, using the metal they held as collateral. With the prime rate at over 19 percent, the interest expense, even for the Hunts, was awesome.

And as with the gold corner of a hundred years earlier, the U.S. Treasury could always break the Hunts’ corner at will. The government held massive quantities of silver.

With the price of the metal more than ten times what it had been a decade earlier, mines that had been closed for years because they could not be worked profitably could now be worked very profitably indeed and reopened. Equally, huge amounts of silver began coming out of attics and basements. No one knows how many tons of Victorian tableware were melted down and joined the floating supply. The metal content of the old silver coins was now worth more than the face value or even the numismatic value, and people sold them while the selling was good.

With the amount of silver in the market increasing, and the Hunts virtually the only buyers, the price crumbled. They were forced to borrow more and more money to prop it up, straining even their resources to the limit. The nation’s leading banks and brokerage houses were strained as well, for they had lent the Hunts more than $800 million, equal to about 10 percent of all the bank lending in the country in the previous two months.

By March, the price of silver was below $40 an ounce and falling fast. Then, on March 27, the corner collapsed after the Hunts were unable to meet a margin call. Their brokers, in deep jeopardy themselves, began to sell them out, and panic reigned on Wall Street. The stock market plunged while the price of silver lost half its value in a single day, closing at $10.80. By the time “Silver Thursday” was over, the Hunts had taken a billion-dollar bath.

Fast action by the major banks and the Federal Reserve prevented the panic from turning into a disaster for the entire financial system of the country. The next day Wall Street rallied sharply, and the markets quickly returned to normal. But for the Hunt brothers things never returned to normal. The bankers and brokers rescheduled their debts, allowing them to pay them off over ten years. It was all predicated, however, on the price of silver at least remaining stable. And, in the 1980s, demand stagnated while production soared. The price declined steadily, and the Hunts’ financial situation followed right behind. In 1987, they were forced to file for protection from their creditors.

Frederick Philipse came to Wall Street as a simple carpenter, guessed right, and died the richest man in New York. The Hunt brothers came possessed of the mightiest fortune in Texas, guessed wrong, and are now bankrupt.

Meanwhile, Wall Street’s free market just keeps rollin’ along.