The story begins with a yawning U.S. trade deficit at the beginning of the 1890s.
Fearing rising U.S. demand for cheap money, foreign investors continue to sell American securities and take the proceeds home. Between 1890 and 1894 anxious creditors unload $300 million worth of American securities and transferred gold abroad. 'Few people have any idea of the amount of property in this country that is held by foreigners." National City Bank (the forerunner of Citi) chair James Stillman writes at the time.
Source: Strouse
By the end of 1893 the Treasury's gold reserve has fallen below $60 million.
"Since there was no income tax and the government had no power to issue money, the Treasury had to buy or borrow gold in order to maintain its reserve — and its ability to borrow depended on foreign confidence in the dollar," Strouse writes.
Source: Strouse
The main problem is that President Cleveland is unable to convince Congress to issue new bonds that could be sold in exchange for gold.
Sentiment against "goldbugs" — including from Cleveland's own Treasury secretary, John Carlisle — is running high. Western and Southern states instead favor silver. Cleveland, a New Yorker, had at one point been declared the "great financial Gorgon." By February 1894, Treasury was losing over $2 million a day. The government would default in three weeks time.
Source: Strouse
Even less popular than Cleveland, however, is JP Morgan.
Any mention of his name provokes howls of disdain. Much of the country is convinced he is single-handedly responsible for thwarting a weakening of the dollar. (This theme would be taken up by William Jennings Bryan a year later in his "cross of gold" speech.) Cleveland knows Morgan could help resolve the crisis, but fears public backlash, so tries to keep him out of the crisis negotiations.
Source: Strouse
Morgan enters the picture anyway.
Cleveland contacts financier Nathaniel Mayer Rothschild in England. Rothschild immediately calls Walter Hayes Burns, another banker, who cables Morgan, his brother-in-law.
Source: Strouse
Morgan's been mulling the problem the whole time.
He reasons that he could probably corral a group of international bankers to buy out a new bond issue, but the government would have to back it in gold or sterling. But the problem again: Congress must authorize all gold bond issues, and many Representatives believe the "emergency" has been trumped up by eastern plutocrats.
Source: Strouse
Negotiations between New York and Washington proceed, and a solution appears in sight.
News is leaked that a bailout is coming, which calms market anxiety. On Feb. 3, Morgan cables Burns, his English brother-in-law: "Effect of abandonment upon all interest would now be worse than if never begun."
Source: Strouse
But on Feb. 4, disaster strikes: Treasury Secretary Carlisle cancels negotiations.
Carlisle, a staunch silverite from Kentucky, says the bailout syndicate's terms are too harsh. The President will force Congress to authorize gold bonds for sale directly to the public instead, he cables Morgan.
Source: Strouse
Enraged, Morgan grabs the next train to Washington.
He wires Burns: "We consider situation critical, politicians appear to have absolute control. We shall make strongest possible fight for sound currency, if fail & European negotiations abandoned it is impossible over estimate what shall be result U.S....Must admit am not hopeful."
Source: Strouse
Morgan arrives at Union Station that evening and is met by War Secretary Daniel Lamont, who tells him Cleveland will not meet with him.
He ends up meeting with Attorney General Richard Olney, saying he has a plan but will go back to New York if Cleveland is not interested. Olney is able to convince Cleveland to meet with Morgan and his delegation at 9:30 a.m. the next day.
Source: Strouse
Morgan cables Burns: "Still some hopes but small, have strong allies in Cabinet but greatest fear Secy Treasury."
He spends another hour alone in his hotel room at The Arlington smoking a large Rosa de Santiago Celestiale cigar and playing out rounds of solitaire.
Source: Strouse
Morgan and his delegation show up at the White House the next day, and are taken to the library Cleveland uses as his workroom.
Morgan, his partner Bob Bacon and his layer Frank Stetson are seated in a corner of the room. "Morgan sits silently, rolling an unlit cigar between his fingers," Strouse writes. There is a delay of what "feels like hours" before Cleveland gets up to begin the negotiations. Meanwhile news continues to trickle in of the Treasury's dwindling gold stocks.
Source: Strouse
Morgan unleashes: the government is in fact already in technical default.
He claims to have knowledge that warrants for $12 million of Treasury gold are outstanding for the day. The Treasury only has $9 million.
Source: Strouse
But he's found a loophole.
Thirty-three years ago, in the throes of the Civil War, Congress had authorized Treasury Secretary Salmon P. Chase to issue bonds that could be offered for coin. If the gold bailout Morgan was proposing could be considered a bailout in coin, it would not require Congressional approval. Stetson had checked, and the statute appeared to still be valid.
Source: Strouse
Attorney General Olney investigates, and gives it the okay.
Cleveland is reassured, but says all must avoid revealing the meeting's existence. Congress will reject his proposed bond issue, which will then give them the opportunity to justify using the loophole.
Source: Strouse
Cleveland asks for one more guarantee: that the international bailout team will ultimately keep the gold in the U.S.
Morgan agrees, which Strouse writes amounted to "controlling the international markets for gold and foreign exchange during the life of the contract."
Source: Strouse
The final terms are struck, with the government agreeing to get slightly hosed.
The government will buy 3.5 million ounces of gold coin from the bailout team at $17.80 per ounce, in exchange for $62.3 million worth of 30 year bonds paying 4%. The price of gold is actually $18.60, so the government ends up paying for $65.1 million in gold in exchange for $62.3 million in bonds — paying a $3 million premium. The syndicate would have six months to complete the contact, and would procure half the new gold abroad at a rate not exceeding 300,000 ounces a month.
Source: Strouse
After four and a half hours, Morgan has bailed out the United States.
"When Morgan stood up [to leave the meeting], a fine brown powder drifted from his lap to the floor. He had all morning been grinding the unlit cigar in s hand into dust." Twelve days later, the bond issue was offered and sold out in 20 minutes.
Source: Strouse
