THE SECRET LIFE OF CAPITALISM Part Two

I don't suppose most people have ever heard of Henry Comestock (above). And the few who know he was the namesake of the 1859 Comestock Lode strike, probably do not know he had acquired his share of the richest silver strike in history not with a pick and shovel, but by trading a mining claim for an blind horse and a bottle of whiskey. But even fewer know that within 10 short years Henry was flat broke again. In September of 1870 Henry Comestock took advantage of the poor man's retirement plan. He shot himself.

William “Billy” Ralston (above), aka “The Magician of San Francisco”, founder and manager of the Bank of California, had no intention of suffering a similar fate. In 1864, almost by slight of hand, he convinced twenty-two of California's Gold Rush millionaires to finance his new bank. He used their capital to make loans to miners in the Comestock Lode. And although Ralston did not invent the idea of giving the miners the shaft, he did practice it on an industrial scale. He carefully hid loopholes in his loan documents, and used them ruthlessly, to ensnare miner after miner, and to make himself one of the richest and most powerful men in California.

He invested his profits in wool mills, cigar factories, hotels and theaters. And he gave money to the needy so willingly that it seemed at times as if Ralston wasn't interested in money, so much as he had an insatiable hunger to be richer than he was. And that was why in the spring of 1872 he jumped on the diamond mountain with such enthusiasm. And having jumped, he wanted to squeeze the original founders of the strike, Philip Arnold and John Slack, out of the deal completely. But his problem in this case was that to properly exploit the diamond mountain Ralston figured he would need $50 million, far more than even he possessed. He needed lots of investors, and lawmakers to protect the investment. Ralston sent his good friend and sometime business partner, the magically named Asbury Harpending to New York City on the transcontinental railroad with a bag of gems and instructions to get them valued by none other than the “King of Diamonds”, Charles Lewis Tiffany.

The truth was Charles Tiffany had never seen a raw diamond in his life. What he was, was a marketing genius. He had opened his stationary store in 1837 with $1,000 in capital borrowed from his father. Then, when P.T. Barnum had to shoot one of his elephants, Charles Tiffany bought the poor pachyderm's hide and had it sewn into cigar cases, diaries and wallets. When Barnum's Tom Thumb got married, the miniature pony and coach which carried the diminutive bride and groom away from the church, were provided by Tiffany, and beforehand displayed in his store. And when the the first Transatlantic Telegraph cable was completed in 1858, Tiffany bought several hundred yards of the excess wire, sliced it into sections and sold it mounted on plaques. On the first day of sales, the crowds were so large the police had to restore order – or so Tiffany claimed

But it was Gideon Reed from Boston who ran the firm's Paris store, and who invented the diamond engagement ring, to handle a glut of small stones from South Africa then swamping the market. And it was George McClure, the companies' head gemologist, who oversaw the army of designers who created the Tiffany jewelry style. But nobody outside of the diamond industry had ever heard about those guys. Charles Tiffany (above in his 5th Avenue shop) was the public personification of Tiffany and Company. And so when Asbury Harpending stepped off the train in Pennsylvania Station in the spring of 1872, it was Charles Tiffany's valuation of the gems that he was seeking.

Asbury Harpending (above) described Tiffany's dramatic performance, at his lawyer's home. “A number of distinguished men were present to see the gems displayed...General George B. McClellan, Horace Greeley, Mr. Duncan, of the banking house of Duncan, Sherman & Co....(and Congresman) General B. F. Butler...I opened the bag of diamonds....Mr. Tiffany viewed them gravely, sorted them into little heaps, held them up to the light, looking every whit the part of a great connoisseur. "Gentlemen," he said, "these are beyond question precious stones of enormous value”...In an official statement, still available, his valuation on the lot was $150,000....At that figure, we had diamonds enough already in stock to make up a total of $1,500,000 in hard cash, whenever we wanted to turn them into money....The news of the Tiffany appraisement...soon became common property in New York and made a big stir in speculative circles.”

Thrilled at Tiffany's estimation of the value of the diamonds, back in San Francisco William Ralston officially incorporated the San Francisco and New York Mining and Commercial Company, with a million dollars in “working” capital, and 100,000 shares of stock, initially valued at $40 a share. William Lent was named as President, Ralston named himself as treasurer, and David Colton became the general manager. Even the Baron Rothschild bought stock in the new company.

As the addition of the word “Commercial” indicated, Ralston was dreaming big – very big. The board of directors of his new company were empowered not only to dig out the diamonds of Diamond Mountain – where ever it might be – but they were also empowered to cut and polish the stones, and develop the market for them. Less than six months after Allen and Slack had shared the existence of the Diamond Mountain with him, Ralston was planning on transplanting the entire Amsterdam (above) diamond market to San Francisco, replete with cutters, polishers, graders, wholesalers and, of course, customers. Anyone who could be helpful to Ralston's grand plan, including Congressman Butler, was granted shares in the new venture.

What the rotund Congressman Butler (above) from New York delivered were a few words added to the General Mining Act of 1872, approved in record time and with a minimum of debate in either the house or the Senate, and taking effect on July 9^th.  This bill established the price of a mining claim on federal land at $2.50 to $5.00 an acre, a figure which has resisted all pressure for an increased benefit to the federal purse for the last 140 years. Under this landmark legislation, bargain priced mining claims made be made by those seeking gold, silver, copper or, as Butler amended the act, “other valuable deposits”. In short, diamonds.

By the time this loose end had been tied down, Philip Allen and John Slack were back in San Francisco again, with another bag of diamonds and sapphires. By this time, however, William Ralston had managed to convince the Kentucky simpletons to sell their entire claim to him outright. Their price was $660,000.00; half up front and half upon a final examination by a third engineer, picked by Ralston,  and the revelation of the exact location of the claim.

The man Raston picked for this final and most important appraisal of the diamond mountain was one of the most respected consulting mining engineer's in America, a man whose 600 previous appraisals had been so accurate his clients had never lost a dollar on his jobs; Henry Janin. His fee was standard - $2,500 in cash, all expenses paid to and from the claim, chemicals required to confirm the quality of the claim, and the right to buy 1,000 shares in the enterprise at a nominal price. It was all boiler plate, industry standard arraignments. Of course, contained within them were the seeds of destruction for the entire enterprise, and everyone associated with it. But at least one person had figured that out ahead of time.

- 30 -