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.The Eternal American Battle - Humans V Money

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Wednesday, October 10, 2012

NO EGO IS AN ISLAND


I must begin by telling you there was once a real island in the Chicago River, where Canadian Geese nested. But by 1850 the original Goose Island was gone, and the name had been re-applied to 160 acre man made island, 1.5 miles long and ½ mile wide, created by dredging the North Branch Canal across a bend in the Chicago River. By the 1890's this new island was crowded with soot spewing factories, eleven coal yards, a gas plant, a railroad and four grain elevators, and it had acquired yet another title; “Little Hell”. Through the magic of capitalism, this hell on earth was controlled by one man - Philip Danforth Armour. He was known as the “King of the Meat Packers” (he invented the phrase “we use everything but the squeal”) or “The Old Bull of the Wheat Pit”, while his underpaid employees invented a few other epithets for him. But Armour's faux Goose Island would prove to be his ace in the hole, in a game of capitalist poker.
The player betting against Armour was a 29 year old Harvard educated ego named Joseph Leiter, who would boast that he was a thousand years ahead of his time. And that was unfortunate for him, because at the time, who your father was, was more important than who you were, and Joe was the only son of the fabulously wealthy Levi Leiter. In such a world Joe couldn't lose. And in 1897 the old man went off to Europe, leaving Joe with $1 million to play with (about $25 million today).
That spring Joe stumbled upon the idea of manipulating the price of wheat. It was called “cornering the market”, as in cutting the corner to shorten a trip, the same way the North Branch Canal isolating Goose Island shortened the journey down the river, (while also creating additional docking space for barges bringing in coal and grain) The way this “scalping” was usually done, was by buying futures contracts, Joe would drive up the price, and then, at a time of his own choosing, he would dump them all, catching the other, less well endowed speculators, with their wallets open. It was a game Armour had invented, and often used to inflate his own fortune. Its the way money has traditionally been used to make more money, by manipulating the market. And on April 7th Joe bought his first “contract” for winter wheat at 72 ½ cents a bushel.
That year looked to be a bumper crop for wheat in the upper Midwest, and by June the price for a futures contract in Chicago had fallen to under 65 cents a bushel. But Joe just kept buying. By July the press had realized somebody was trying to finagle a corner on wheat, and the price for wheat futures started to rise again, as others were drawn into the game. By September futures had reached $1.85 a bushel. If he had sold at that moment, Joe would have profited $500,000 ($13 million today). But Joe let it be known he was the genius behind this particular corner, and assured the market, “I don't want your money, but I do want your grain.” The Harvard man wasn't selling out. He was expecting to take delivery. In other words, he had doubled down.
In that instant the guessing shifted from “how is Joe going to pay for all these wheat futures?” to “Where is old man Armour going to get all that wheat?” Because - Armour controlled the wheat market , because he controlled the railroads and the ships that transported it, and the elevators where it was stored. Most of those futures contracts Joe had bought, he had bought from Armour. As of October Armour had signed contracts requiring him to deliver in December to young Joe Leiter,  9 million bushels of wheat which did not then exist in Chicago. If he didn't deliver he would have to pay Joe the price of the contracts. But nobody in Chicago – nobody in the world - had ever seen 9 million bushels of wheat in one place before. With a shudder the financial pundits of Wall Street and the Chicago Board of Trade, realized that Armour had been Joe's target all along. The young genius had cornered the old bull.
Except, this was Armour's own game. A decade earlier, when he just had two grain elevators on Goose Island, Armour had sold 3 million bushels of wheat he did not have. His response was impressive, He hired an army of carpenters. Remembered a local witness, “Anybody who could drive a nail could get a job there. In three shifts they worked day and night.” One month later two new massive grain elevators stood just north of the older two, complete with systems for “turning over” the wheat to keep it from rotting. Now, Armour sprung into action again.
In late November Armour leased, bought or rented every one of the 134 freighters on the Great Lakes and dispatched them all to Duluth, Minnesota. He followed that by a fleet of tugboats to keep the channels ice free. And his railroads were also busy ferrying wheat to Goose Island. On December 19, 1897 Armour delivered the first 1 ½ million bushels, on time. But the ships and trains continued to arrive in Chicago, and it seemed Armour could not afford to continue this game for long.
At first Joe shipped his wheat to the east coast markets and sold it as quickly as he could. But that merely opened more space on Goose Island, making Armour's task easier, while driving down the price in the east. Besides, the eastern elevators were not equipped to handle a full season's harvest. So Joe decided to accept the wheat, but let it stay where it was. And if having to lease the elevator storage from Armour cut into Joe's profits, it was also cut Armour's storage space. Joe was still making a profit, but what he had hoped would be $4 million by now,  was instead just $330,000.
The catch was that Armour owned shipping lines, and he knew the fleet alone could hold 11 ½ million bushels, plus, controlling railroads, he knew the capacities of every freight car on his lines. And he knew that every ship and rail car sitting in Chicago filled with wheat already signed for as delivered,  was not available to move that grain to eastern or even European markets. Joe might now own 10 million bushels of wheat, but he could not sell it except at a loss, which grew greater every day.
Joe came to that realization as January of 1898 began. In one January week alone, Armour shipped 2.5 million bushels of wheat south. The Chicago Tribune waxed lyrical. "Does anybody realize what it means to move six or seven million bushels of wheat by boat and rail to Chicago?” They called it, “The most stupendous generalship in connection with the handling of a food product that the eyes of man have ever seen.” But Joe saw nothing poetic in this turn of events. The old Bull had called his bluff. So, Joe being Joe, he doubled down. He started buying spring wheat futures.
Of course this game of giants was not playing out in a vacuum. In the United States of 1897 the average income was just $450 a year, and the cost of food ate up almost 3/4th of that. The average working class family of five survived on $15.50 a week, while Armour's own workers were paid a paltry $9.50 a week  In May of 1897, when Joe started to “corner” wheat, a single loaf of bread in Boston cost 3 cents. A year later that had gone up to 4 cents, all while the United States was experiencing the most severe financial “Panic” and the highest unemployment until the Great Depression (see these columns for Coxey's Army). Prices of wheat in Chicago would not swing between highs and lows this much again until World War One.
But seeing Joe digging in on a losing position, P. D. Armour started buying spring wheat from the Pacific Northwest. In early February of 1898 he started shipping 2 million bushels of wheat by rail from Oregon to Chicago, to fill Joe Leiter's contracts. A hundred years later the Chicago Tribune would boldly point out, “ Armour didn't move 6 million (bushels). He moved 18 million.” Eager to cash in on this bonanza, farmers from Minnesota to Nebraska started planting wheat as soon as they could get into their fields. By April the price of May wheat futures had already passed $1.25 a bushel. On May 10th, 1898 it topped the old record of $1.85 a bushel.
And it was now that old man Leiter, Joe's father, returned from Europe. And although there is no proof it is assumed the two old financial warriors, Levi Leiter and Philip D. Armour had a talk. And quietly, the game came to an end. Armour took his foot off the Harvard boy's throat and Joe stopped buying wheat. By June of 1898, the price of a futures contract for wheat had collapsed back to 70 ½ cents a bushel, near where it had started the year before. The best that anybody can figure it, Joe's little $1 million adventure at taunting the Bull of the Wheat Pit would end up costing his father, after losses and law suits, almost $20 million (close to half a billion dollars in 2012)
How many childrens' empty stomachs this gamble produced is not known. The government would not concern itself with the humanitarian price of “free markets” for another two generations. And curiously, in the United States, the church, not Catholic, Protestant, Mormon, Jewish or Islam, has ever expended much of its moral force on the subject of the cost of capitalism. No one ever bothered to inquire how many families lost their farms when the wheat prices collapsed in an age before farm price supports.
Long after Armour and both the Leiters were dead, on February 7, 1914, a fire destroyed one of Armour’s Goose Island elevators, destroying almost 600,000 bushels of wheat, 310,000 bushels of oats, 95,000 bushels of corn and 5,000 bushels of rye. But not to worry, the company could afford insurance. The payout was $825,250.00 ($18 million today). In a capitalistic nation, if you can afford it, you never have to lose.
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