Think Like a Pirate, pt. 3

post dateAugust 15, 2014  •   post categoriesUncategorized  •   post comments number2 comments

Bank Panic of 1893

There’s an Order to Things

Have you ever watched a baseball game, and seen a batter crack a screaming pop-fly ball into the outfield, and thought:

“Wow, he really crushed that ball!  That thing is never coming back down!”?

Of course not.  We all instinctively know that “what goes up, must come down”.  Now sometimes, it may seem like that ball is taking its sweet time on the way back down, but you never doubt the end result.  This great, old world God has made is governed by ironclad rules set in place. Whether it’s gravity, the laws of thermodynamics, or the Golden Rule, there are laws which keep things ordered, and give us a deep sense of comfort.

The same is true in economics.  There are laws in place which may be fought, denied, or lied about, but in the end, reality always reasserts itself, and there’s nothing anyone can do about it.  Which brings us to the critical juncture of our bid to understand what might’ve possibly caused someone to bury so much gold in the Sierra Nevada hills of 1894 California, in the first place.

A New Paradigm?

The year was 1893, and things were booming in the United States.  The railroad industry, it seemed, was on an unstoppable tear, as thousands of miles of new track were being built every year.  The modern age of travel had certainly dawned, and with it came new opportunities and investment.  Banks and financiers all lined up to extend credit to railroad companies, in hopes of getting a piece of the action.  Everyone got on board this “train”, so to speak, and very soon a speculative bubble had developed around the railroad sector.  The railroad scene was simply “overbuilt”.  As with all other bubbles however, it didn’t simply stay in the railroad sector, but rather spilled into most other areas.

With confidence surging like a rushing water, money also surged into stocks, which, by then, had reached all time highs.  It also spilled over in the form of credit and loans that were over-extended to developing markets, particularly South American markets, such as Argentina.

Banks and financiers, on both sides of the Atlantic, were scurrying at breakneck speeds, to extend credit to seemingly anyone.  Who cared if the loans being offered to you were of the “high interest rate” variety?  Who cared if you might not even be able to pay it back?  These things didn’t matter! There simply wasn’t time for rational questions.  The trend was up, after all!  Things were looking better every day, and could only go on looking better for the foreseeable future!  Such is the way we human beings are, when we’re caught up in false highs of booms, caused by unnaturally sustained waves of artificially cheap credit.

After many years of these practices, the whole situation became strained and tenuous: this baseball had reached its zenith in this particular “pop fly”.  The bubble had been blown all over the world.  All that was needed was a pin, any pin, to reassert reality.

The Pin

In this case, the pin came in the form of one “Baring Brothers” bank, in London.  During the boom, Baring Brothers had given a great deal of high-interest loans to the markets in Argentina.  Unfortunately for them, Argentina had reached its borrowing limit, and was forced to default on its debt.

When Argentina went down, Baring was down for the count too.  With the failure of Baring Brothers, the City of London realized that “the music had stopped”, and a scramble for liquidity(gold) was on.  As the understanding of the problem spread quickly, so did the fear: the fear of being caught in an insolvent banking system, and losing your gold.

SD Bullion

So much gold was withdrawn from the banking system, that the Bank of England was actually forced to go to the Bank of France for a gold loan, in order to continue to meet withdrawal demands.  It was at this time that those same banks in London began to “circle the wagons”, and cut any and all risk plays, in order to maintain adequate gold holdings.  Many companies in the U.S. began to have their loans “called”, and gold, not paper dollars, were demanded as payment.  Since folks quickly realized that the fractional reserve banking system had laid far more claims(dollars) upon each ounce of gold than could possibly be honored, they all rushed to get their money(gold) out of the banks.  After all, when it’s your money in question, you don’t want to be the one left “holding the bag”, do you?

The Fallout in the U.S.

Very soon after these developments, major railroad companies and banks started failing as well, and for the same reason: too many claims were placed upon a pile of gold which was too small to back them.  While the banks further east in the U.S. got the word earlier, and began to build up their gold coffers to weather this storm, many of the banks further west and south fared less well on the whole, due to delay of the news.

Then, all at once, the dominoes started going down.  On May 9th, the Chemical National Bank of Chicago closed its doors, followed two days later, by Columbia National Bank, also in Chicago. The bank run became a rout, as every able-bodied person rushed to get what was rightfully theirs, before their neighbors beat them to it.  Within weeks, the entire financial system was paralyzed.

Many banks, which by now had reached the lowest gold reserve they were legally permitted to, began to suspend payments of gold specie entirely.  If you didn’t have your gold by this point, you weren’t going to get it.  Not for a long while, anyway.  Anyone who didn’t move fast enough to extricate their gold, was caught in the banking system as it went down.  The very lucky, simply ended up having to wait day after agonizing day, hoping that “perhaps this day will be the day I’ll be able to get my gold out”.

Even those people however, found themselves facing an unfortunate reality: their deposits, which were trapped in “Hotel California”, were now selling at a steep discount to gold already withdrawn.  After all, there were many opportunists(the smart money, in this case), who were willing to bet that sooner or later, this crisis would pass, and got their gold out before the worst hit.  Doing that now allowed them to offer the gold they had to others, in exchange for their deposits trapped in the bank, but at a steep premium to what those depositors would normally have paid.  This was an unfortunate, yet totally understandable practice, one which, I’m sure, helped a great many people from going completely under during this time.

As the terror spread like a wave from coast to coast, businesses were shuttered, many thousands of them, and the stock market sold off considerably.  A brief paragraph below gives a good idea of the carnage that the average depositor would’ve lived through during this time:

 “As a result of the Panic, stock prices declined. 500 banks were closed, 15000 businesses failed, and numerous farms ceased operation. The unemployment rate in Pennsylvania hit 25%, in New York 35%, and in Michigan 43%. Soup kitchens were opened to help feed the destitute. Facing starvation, people chopped wood, broke rocks, and sewed in exchange for food. In some cases, women resorted to prostitution to feed their families. 

Unbelievable, isn’t it?  This was a capital “D” Depression.  In fact, before the Great Depression, this was the largest peacetime depression ever to hit the United States, by a wide margin.

By later that year, even though the worst of the bank closings had come, unemployment continued to worsen for several years, and stayed in the double digits for most of the decade. People were angry, and demanded answers.  The picture at the top of this article was a poster for a Broadway Melodrama, produced in 1896, which attempted to explain this great Panic.  This is very similar to how Hollywood later made several films chronicling the Great Financial Crisis of 2008, with efforts such as “Margin Call”.

Needless to say, the fear was palpable, and the victims of the Panic numbered in the millions. The scars which this Depression left on the populace were felt for decades afterward.

Our Mystery Hero

Which brings us to the hero of our story: the person who buried this substantial hoard!  Seen in this context, can you now see how completely logical and understandable it was to have buried this kind of treasure in a time such as that?

As the venerable professor, Antal Fekete, has wisely observed: in times of great crisis, the gold(and silver) of the world isn’t deployed, but rather goes into hiding.  In this particular case, that phrase became quite literal.  

The “Saddle Ridge Hoard”, was a large enough treasure, that it ensured whoever buried it was at least a “lower-upper” class party.  Perhaps he was a ranch owner.  Perhaps he was even a banker, or some other skilled laborer.  Maybe it was simply someone who’d inherited the wealth from someone else.  Who knows? To be honest with you, it doesn’t really matter that much.  The only thing we need to understand was that he had considerable wealth, the safety of which was giving him many sleepless nights.

A look at the Saddle Ridge Hoard amazon site, reveals that of the remaining coins in this tranche for sale, there are currently 166 specimens still available(as of August 15, 2014).  Of that 166, there remains only 1 coin which is dated 1894, while there are many lovely 1893-dated coins.

This suggests several possibilities to me.  Perhaps he was able to get most of his fortune out in 1893, and only acquired the few 1894 coins(due to the close proximity to the San Francisco Mint) when the banks began paying gold coins again later on.  Resorting, finally, to burial of them all, once he had the entirety of the wealth he aimed to collect.  It’s possible.

However, there’s also a much worse scenario that’s highly probable here: it seems to me, that this person was also likely one of the unfortunate souls who didn’t act quickly enough to get their gold out of the system, and that part(or all) of this fortune was frozen in the banking system for some time.

Can you imagine your entire life’s work, utterly trapped?  With no possible way to recovery it?  Can you imagine spending weeks, or even months, wondering if that one fateful day your local bank teller had told you, “I’m sorry, but management has decided to suspend gold withdrawals until further notice”, was the day that you went from being wealthy to being permanently destitute?  Can’t you just imagine the person’s hair turning whiter, the new wrinkles appearing on their face during such an ordeal?

I can, and the thought is completely unnerving.  If that is the case, then it seems even more understandable.  That after pacing the floor every, single night for many months, our hero would’ve been up, bright and early in the morning, waiting for his bank to open, having heard the announcement: “gold withdrawal will now recommence!”

Can’t you see him literally kissing the coins which the banks finally presented to him?  It seems even more reasonable that in a fit of unbridled elation, he would’ve loaded the coins into a satchel, and ran from the bank to the nearest trade store: grabbing a shovel, and a few cans of coffee off the shelves, and mounting his horse, headed somewhere….anywhere!  

Anywhere there wasn’t another possible human soul around, is where he was bound! 

After all the holes were dug, and the dirt was tamped down, can’t you just hear him exclaim aloud:

By God, never again!”

Yes.  It all seems so very reasonable, now.  Doesn’t it?


SD Bullion

This explanation doesn’t answer all our questions, to be sure, like: why was the treasure never recovered?  I don’t know, but in the end, I kind of like it that way.  After all, this whole story, and the treasure which excites us, wouldn’t exist had they returned to reclaim it.  Our job has been merely to search for plausible motive, and this fits the bill better than anything I’ve heard presented.

There is one question I’d like to ask you, though:

Do you realize, at this very moment, there’s a very good chance that you’re in danger of facing the same nightmare scenario as the unfortunate soul described in this story?

Continued here, in pt. 4


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