How a miscommunication led to a financial scandal

Fraud schemes like the Black Friday gold scandal of 1869 capitalize on market flaws and the rules that direct them. To protect investors against financial market manipulation, fraud examiners can learn from past cases and the patterns they reveal.

In the U.S., the term “Black Friday” is associated with the Friday after Thanksgiving, which launches the holiday shopping season. But the term has another meaning that originated more than 150 years ago. 

In 1869, the post-American Civil War economy in the northern states was industrializing rapidly. Railroads expanded, and new industries like steel and oil emerged. Then-President Ulysses Grant and Treasury Secretary George Boutwell attempted to revitalize the economy by signing executive orders to protect government-worker wages and reduce the national debt. Grant signed into law the 1869 Public Credit Act to pay public debts in gold rather than “greenbacks,” or government-backed money still in use from the Civil War. 

This action, however, set the stage for opportunists and speculators, and caused a significant drop in the price of gold in the U.S. It also resulted in the Black Friday gold scandal. The incident illustrates for today’s fraud examiners key issues regarding market manipulation, the risks associated with political intervention and insider trading, and the need for strong regulatory measures. Here’s an explanation of this historic case, and how current fraud examiners can better prevent and detect market manipulation schemes.

Post-Civil War social and economic rebound

In early 1869, U.S. farmers and city workers in the southern states faced more competition as the economy grew and society changed. Bankers, merchants and business leaders — and gold speculators — asked the U.S. Treasury Department to stop selling gold. They thought this would increase its price, make farm products cheaper to export and boost the economy by creating jobs. At that time, gold coins were priced low and fell out of favor. Government-issued “greenbacks” (paper money) circulated widely, and the gold market was volatile and easy to manipulate. As a result, the government halted gold sales indefinitely to maintain a more constant gold supply.

The gold market in the U.S. at the time was estimated to be worth $31 million. New York banks held between $15 million and $20 million, and overall, the gold market was affected by the government’s pricing actions. Prices decreased when the government sold its supply of gold reserves and increased when it didn’t, creating a market shaped by unpredictable pricing trends. 

Enter the robber barons

Investors realized that the fluctuating exchange rate in the gold market presented opportunities for profit. In early September 1869, two “robber barons,” influential figures in the business world, railroad magnate Jay Gould and financier Jim Fisk, tried to monopolize the gold market by acquiring as much gold as they could to inflate its price. 

Gould recognized that global events would influence the price of gold, from the 10-year Cuban insurrection that began in 1869 and the looming Franco-Prussian conflict, to a diplomatic dispute between the U.S. and Great Britain. His investment strategy of purchasing $7 million in gold helped drive up its price before undertaking his next scheme.

Gould claimed his strategy would generate a strong U.S. dollar compared to other currencies and would help farmers make more money selling their crops abroad. He and Fisk decided to work with Abel Corbin, Wall Street manipulator and Grant’s brother-in-law, to use his connections to the U.S. president to support higher gold prices.  

Fisk and Gould met with Grant during a cruise between New York and Boston on Fisk’s ship. They impressed Grant and quickly gained favor with him. After the cruise, Corbin suggested former General Daniel Butterfield, a friend of Grant’s, for the assistant U.S. treasurer position in New York, where he’d manage government gold sales on Wall Street. Once Butterfield was appointed, Gould gave him $10,000 in exchange for insider information on government gold actions. Meanwhile, Grant supported higher gold prices to assist farmers with overseas exports.  

The telegram that became a tipping point

Gould and Fisk’s plan looked good initially, but they worried Treasury Secretary Boutwell might lower gold prices by selling government gold. Gould pleaded with Corbin to write a letter to Grant, asking him to keep gold prices high by not selling. Gould was so concerned that he had the letter delivered to Grant by special messenger.

Gould gave the messenger, William Chapin, instructions to deliver the letter and wait for a reply. “Telegraph back to me whether the letter is satisfactory,” he told Chapin. Depending on the response, Fisk and Gould would determine whether it was safe for them to proceed with their plan.

Chapin, unaware of how crucial the phrasing of his telegram would turn out to be, delivered Corbin’s letter to Grant in Washington, Pennsylvania. Grant read it in private and returned to Chapin minutes later without saying anything about the letter. Chapin was in a hurry to return to New York and asked Grant if all was satisfactory, to which Grant reportedly replied, “All right.”

Chapin then dispatched a telegram to Gould from a Washington telegraph office with the message, “Letters delivered all right.” Gould and Fisk interpreted the response to suggest that Grant affirmed everything was fine regarding the government’s strategy and was giving them permission to purchase gold. They invested heavily in gold over the following days, pushing the price up to $140.50 ($3,346 today) by Wednesday, September 22, 1869. 

Chapin stated later in a Congressional testimony, “I did not know anything about the contents of the letter. I meant to say that he had received the letters and read them; that they had been delivered all right.” A New-York Daily Tribune article from October 25, 1869, claimed that Gould deliberately created the impression that Grant was in league with the group.   

In reality, the letter upset Grant, who felt tricked and suspected his brother-in-law was also being fooled in the financial scheme. On September 22, Grant asked his wife to notify Mrs. Corbin about her husband’s involvement. Later that day, Gould was visiting with the Corbins just as a telegram arrived warning Corbin’s wife about his suspicious activities. 

The loose thread unravels

Gould quickly realized his risky situation, and Corbin urgently wanted to sell his gold. Gould offered Corbin $100,000 to delay selling to avoid alarming other investors. He also decided to unload much of his own gold but told his brokers to continue buying small amounts to make it appear that he had confidence in the market.

Fisk didn’t know about Mrs. Grant’s warning telegram to Mrs. Corbin and kept telling investors that Grant supported high gold prices. Because of Fisk’s claims, by the evening of September 23, trading at the New York Gold Exchange, known as the Gold Room, surpassed $325 million (more than $7 billion today).  

That same evening, Grant authorized Secretary Boutwell to sell $4 million in government gold (about $95 million today) to disrupt the chaos in the market.  

Black Friday

On Friday morning, September 24, Gould and Fisk started buying gold, thinking they had Grant’s backing. When trading began, the price of gold quickly rose above $160 an ounce. News spread that the federal government was selling gold, causing the price to fall. By mid-afternoon, gold dropped to $135 an ounce in less than two hours.  

The 1869 gold crash plunged the stock market by 20%, destroying many brokerage houses and small investors. Wall Street firms went bankrupt, and agricultural exports of wheat, corn and cotton tumbled by 50%. The scandal hampered the U.S. economy for months. 

Gould unloaded much of his gold quickly, netting about $12 million (about $286 million today). Fisk avoided responsibility by claiming that third-party brokers initiated trades without his written permission. Despite government investigations and accusations of misconduct, Gould and Fisk escaped legal consequences due to their connections and expert legal counsel. Butterfield resigned in October 1869. Fisk, however, was murdered in 1872 by Edward Stokes, a former business associate, who tried to blackmail him over a romantic affair.  

Fighting against market manipulation today

The 1869 Black Friday gold fraud is a key example of the type of financial fraud that still influences modern precious metals scams. In 2023, two former traders at JPMorgan Chase & Co. were sentenced for engaging in fraud and attempted price manipulation. They ordered precious metals futures contracts that they intended to cancel before they were executed to drive up prices. According to court documents, they engaged in tens of thousands of deceptive trading sequences, resulting in market participants losing more than $10 million.

Today, we also see similar tricks used in recent cases of gold price manipulation by big banks. Although methods have changed with technology, the patterns of price manipulation and their results remain the same.

Fraud examiners investigating schemes that target securities and commodities markets can watch for these red flags:

1. Increases in trading volume during geopolitical tensions or economic reports may suggest market manipulation. Large trades by institutions often happen before or after big price changes, indicating an agenda to influence buyers a certain way.
2. Media campaigns often promote certain views about investments to influence how people feel about them. They’re not always based on market facts, but whether they praise or criticize can affect investors’ views and choices.
3. Political events, such as changes in monetary policy and geopolitical tensions, can indicate price manipulation. Statements from powerful figures can create fear, leading to an artificial increase in demand and altering market value.
4. Announcements from central banks can happen alongside big changes in commodities prices and raise doubts. Their actions, like sudden increases in reserves or unexpected sales, may be intentional to shape market perceptions and prices.
5. Derivatives activity, like more futures contracts, may show speculation that doesn’t match real supply and demand. Sudden increases in derivatives metrics can suggest possible market manipulation or too much speculation, especially if they don’t correspond with physical sales or inventory changes.
6. Unusual trading volumes without clear reasons may reflect outside influences on the market instead of real supply and demand.  

Throughout history, gold markets have been subject to manipulation. Ordinary investors, lacking connections or insider knowledge, often suffer the most damaging losses. The Black Friday gold scandal of 1869 serves as a timeless reminder of the various forms financial fraud can take and the necessity of vigilant, independent and well-regulated financial systems.

Donn LeVie Jr., CFE, has been a staff writer for Fraud Magazine since 2011 and has served as a presenter and leadership strategist at ACFE Global Fraud Conferences. He led people and programs for Fortune 100 companies, the federal government and academia for more than 30 years before retiring last year. LeVie now performs private classical guitar house concerts in the Greenville-Asheville area, builds custom electric guitars and uses live classical guitar performances to teach leadership performance. Contact him at donnleviejr@gmail.com.