The Lockup of Greenbacks

By Daniel Drew, in the late 1800s
We now set out on a Bear campaign – we three: Gould, Fisk and I.

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…

Steve's note: Today's DailyWealth is something different… a firsthand account from one of Wall Street's shadiest characters. While Daniel Drew apparently had no morals, he did know what causes stocks to go up and down on Wall Street.
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. Money was easy as an old shoe. When money is easy, stocks go up.

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 do, 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.

In this work of making money tight, 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.

The banks are required by law to keep as reserve twenty-five per cent of their deposits. This is in order to take care of their depositors.

When their cash on hand is over and above this twenty-five per cent margin, bankers loan money free and easy. As soon as their cash begins to creep down to the twenty-five per cent limit – which can almost be called the dead line – 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. The banks would have to tie up enough funds to take care of these certifications. 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 signs pointing to a big revival of trade.

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."

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."

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 to 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, besides the certifications.

He called a hasty council of the officers of the bank. Messengers were being sent out on the double-quick to all the stock brokers who were customers of the bank, notifying them they were to return their borrowings to the bank at once.

As each of these stock brokers 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.

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; "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.

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 it 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.

I told Gould and Fisk that I wasn't going to be with them in this lock-up deal any longer. Even though I drew out of this lock-up deal, I got a good share of the blame. In fact, people seemed to curse me more than they did Gould and Fisk; because they said these other two were younger – were pupils of mine. And that I was chargeable for getting them into these plundersome habits, as they called it.

If I had ever cared much for the speech of people, I suppose I'd have taken the thing to heart. But I never cared what people were saying, so long as they didn't do anything but talk.

Talking doesn't hurt. You can pass it by. This locking-up of greenbacks had netted us so fine a penny that we could afford to stand a lot of abuse…



– Excerpted from The book of Daniel Drew: a glimpse of the Fisk-Gould-Tweed régime from the inside, by Bouck White, published 1913. Thanks to the University of Michigan Library for hosting the original.