Stock_gambling book cover

When Stock Speculation Was Rampant in San Francisco

Stock_gambling book cover

About a decade after the California Gold Rush came a silver rush resulting from the discovery of the Comstock Lode in Nevada. What distinguished the latter from the former was that the bulk of the people who expected to get rich from it did not go out there with a pick and shovel but instead speculated on the San Francisco Mining Exchange (which would later become the San Francisco Stock and Exchange Board), for that is where they thought the real money was to be made.  Unfortunately, it would only be made by a few who profited at the expense of the masses who lost their fortunes pursuing dreams of great riches. The best example of the few is the Bonanza Kings, the nickname given to four men who gained control of the Consolidated Virginia Mining Company and then brilliantly opened a stock brokerage firm which allowed them to manipulate the share price and repeatedly buy low and sell high to a never-ending supply of suckers. Even though their mines had only yielded $150 million worth at their peak in 1879, their market capitalization (or speculative value) reached an unsustainably high $1 billion. Share prices that started out between $4 and $5 soared as high as $710.

It was around this time period of rampant speculation that J.F. Clark, a former stock trader, published The Society in Search of Truth, or Stock Gambling in San Francisco. IFA recently acquired a first edition of this book for our library of antique finance books. A work of fiction, it tangentially tells the story of a brokerage firm (Trackem & Cinchem) that swindled many people only to have the tables turned on them by an extraordinarily clever man known as the General. Clark describes in detail how the brokers would record buy orders at the highest price of the day or sometimes even higher if they thought they could get away with it, and vice versa with sell orders. He also lifts the veil on shady practices such as spoofing the market with false information and entering bogus trades to manipulate the stock prices. The General is undoubtedly speaking for Mr. Clark when he says, “The stock gamblers are like a flock of sheep, who invariably follow the bell-weather, and hurry pell mell in one direction, and that the leaders in the stock gambling scramble are but decoys, who are put up to lead and lure the masses to destruction.” Clark describes another stockbroker character as, “never loth to devise a means to excite interest in the stocks he controlled, to induce his rich neighbors to invest in them, which virtually meant the transfer of their funds to his coffers.” For us, this is completely reminiscent of the lunch scene from The Wolf of Wall Street where the veteran Matthew McConaughey explains to the newcomer Leonardo DiCaprio, “Name of the game—move the money from your client’s pocket into your pocket.”

We are reminded of what the book of Ecclesiastes says, “There is nothing new under the sun.” It is true going forward in time, and equally true going backward in time. One of IFA’s prize possessions is an original edition of The Great Mirror of Folly which satirically depicts the speculative hype and subsequent crash in 1720 of the Mississippi Company and the South Sea Company. The term used throughout is “the wind trade” because prices no longer had any connection to fundamental company values but were based on hopes, rumors, and misinformation. Below is a painting commissioned by IFA from one of the many engraved illustrations that depicts the chaos and lunacy of the wind trade. Notice the Goddess Fortuna distributing stock certificates while the devil is blowing bubbles and the poor bookkeeper is being crushed under the wagon wheel, indicating that the mundane activity of accounting has no role to play here.

 

 

The wind trade describes exactly what happened with the mining companies in a repeated cycle of discovery, exaggerated potential, and subsequent disappointment. A New York Times article from 1886 captures the flavor of the speculation running amok. The title is “San Francisco Gone Mad” and the byline reads, “The mining stock speculation excitement at fever heat.” The author describes the pandemonium: “People of all classes were rushing around with sacks of coin in their hands trying to secure satisfactory investments.” Even though this exact scene played out several times before with an unhappy ending, somehow they thought that this time would be different. As the author notes, “In a word, the city has gone mad, and when the inevitable reaction comes—a matter of but a few days at the furthest—there will be a crash from which it will take years to recover.”

While we may ridicule the wind trade of prior centuries, we should not forget that we had our own wind trade in the dot-com stocks of the late 1990s. Yes, technically it was only peripherally in this century, but we seriously err if we assume that we are insusceptible to it happening again. In fact, one could argue that the Global Financial Crisis of 2008-9 resulted from a wind trade in residential real estate and the derivative securities created around it. An excellent book that provides an insightful history of financial market crashes is Charles P. Kindleberger’s Manias, Panics, and Crashes. IFA is fortunate to have acquired a first edition of this classic book. The San Francisco crashes are not addressed probably because they were highly localized and were not linked to a national recession or depression.

To summarize, although we would have worded it differently, we definitely agree with the gist of Clark’s conclusion that aside from being addictive, stock gambling is:

1)     Subversive of morality and truth

2)     Conducive to frauds and trickeries

3)     Productive of disasters and distress

4)     Injurious to industry and commerce

5)     Disgraceful to many concerned